Independence Contract Drilling, Inc. (NYSE:ICD) This fall 2022 Earnings Convention Name March 2, 2023 12:00 PM ET

Firm Contributors

Anthony Gallegos – President and Chief Govt Officer

Philip Choyce – Govt Vice President and Chief Monetary Officer

Convention Name Contributors

Don Crist – Johnson Rice

Steve Ferazani – Sidoti

Dave Storms – Stonegate Capital Markets

David Marsh – Singular Analysis

Jeff Robertson – Water Tower Analysis

Dick Ryan – Oak Ridge Monetary

Operator

Hi there and welcome to the Independence Contract Drilling Inc. Fourth Quarter and Yr Finish 2022 Monetary Outcomes Convention Name. [Operator Instructions] Please be aware this occasion is being recorded. I’d now like to show the convention over to Philip Choyce, Govt Vice President and Chief Monetary Officer. Please go forward.

Philip Choyce

Good morning, everybody and thanks for becoming a member of us right now to debate ICD’s fourth quarter 2022 outcomes. With me right now is Anthony Gallegos, our President and Chief Govt Officer.

Earlier than we start, I want to remind all contributors that our feedback right now will embody forward-looking statements, that are topic to sure dangers and uncertainties. A lot of components and uncertainties might trigger precise leads to future durations to vary materially from what we speak about right now. For an entire dialogue of those dangers, we encourage you to learn the corporate’s earnings launch and our paperwork on file with the SEC. As well as, we discuss with non-GAAP measures throughout the name. Please discuss with the earnings launch and our public filings for a full reconciliation of web revenue and loss to adjusted web revenue and loss, EBITDA and adjusted EBITDA and for definitions of our non-GAAP measures.

And with that, I’ll flip it over to Anthony for opening remarks.

Anthony Gallegos

Hi there, everybody. Thanks for becoming a member of us for our fourth quarter earnings convention name. And through my ready remarks right now, I wish to speak about three issues. First, I wish to spotlight our 2022 accomplishments. Second, I wish to describe the present marketplace for super-spec, pad-optimal rigs and the way that can impression ICD. And third, I wish to shut out with what we’re centered on as we navigate 2023 and past.

However first only a few feedback on the quarter. General, ICD’s fourth quarter outcomes got here in effectively forward of expectations when it comes to revenues, margins and adjusted EBITDA. Phillip will undergo the element, however I wish to level out that our reported income per day, margin per day and quarterly adjusted EBITDA have been all once more data for ICD. That is the second quarter in a row we now have produced report outcomes. As well as, as the total yr 2022 performed out, we noticed adjusted EBITDA enhance by greater than 5x measuring fourth quarter to the fourth quarter of final yr. And we’re effectively positioned in order that 2023 would be the finest yr by large margin in ICD’s historical past, whether or not it’s income per day, margin per day or general free money stream.

As we closed out final yr, we achieved extra strategic targets. Along with producing rig margin per day exceeding most of our trade friends, we ended the yr with 20 rigs working, activated 2 extra rigs throughout the fourth quarter. Each of these rigs went to work within the Haynesville on superb contracts. As well as, we efficiently accomplished our first 200 to 300 sequence conversion, involving a rig working for a buyer in West Texas, proving that our 200 to 300 sequence conversions are technically and commercially viable, it was crucial for us as we will now market 100% of our marketed fleet with 300 sequence specification if the market pulls us that manner.

On the operational security entrance, our security efficiency based mostly upon reported TRIR was over 20% higher than the U.S. land common as reported by the Worldwide Affiliation of Drilling Contractors. We completed a lot in 2022 and I’m very pleased with how our operations and help groups proceed to ship excessive ranges of customer support, efficiency and professionalism, which our clients anticipate from ICD. That is particularly noteworthy given the unprecedented challenges involving the labor market and provide chain challenges, which proceed to plague the worldwide enterprise neighborhood and extra lately, the softness in pure gasoline costs.

Trying forward, we’re finalizing the reactivation of our twenty first rig in our Odessa, Texas yard, which is one other 300 sequence rig. This reactivation challenge was began again in October of final yr and will likely be our final reactivation for some time. Like our different 300 sequence rigs, this rig possesses the technical capabilities that our goal clients favor right now. We’re in last contract negotiations for this rig and anticipate the rig will likely be mobilized into its maiden contract involving work in West Texas throughout the second quarter. All-in-all, ICD entered 2023 in a really robust place, whether or not from a margin per day and money stream technology perspective or a fleet composition perspective the place we now have materially elevated the proportion of rigs marketed with our 300 sequence specification. ICD has by no means been stronger. The entire onerous work we now have put into positioning ICD whereas bouncing off the pandemic backside will likely be on full show as we navigate the New Yr.

And with that, I wish to shift to our present market perspective. And particularly, what’s on everybody’s thoughts, what the softness in pure gasoline costs means for ICD strategically in 2023. First, let me deal with the general market and outlook for rig exercise for pad-optimal super-spec rigs in our goal markets of Texas within the contiguous states. General, demand for pad-optimal super-spec rigs stays robust. Right this moment, general utilization stays above 90% within the trade and we anticipate continued enchancment in our rig margin per day within the first quarter pushed by contract rollovers as we reprice rigs contracted early final yr.

Phillip will present extra detailed steering, however I needed to focus on that we presently anticipate our margin per day to extend to between $15,000 and $15,500 per day within the first quarter forward of our prior steering for that quarter. Nonetheless, the sharp decline in pure gasoline costs throughout the previous 4 months has created a disparity between our two major working basins. Within the Permian, which is all directed exercise, demand stays sturdy and we predict an general uptick within the super-spec rig depend in that basin in 2023.

By way of our Haynesville market, which is tied to pure gasoline commodity costs, we’re seeing softness within the Haynesville rig market pushed by the E&P’s response to Henry Hub pure gasoline costs, which have declined from $9.68 on August 22 to $2.12 per million Btu final week. As we’re nearing the top of winter and gasoline stock ranges stay excessive on a historic foundation, mixed with takeaway constraints within the Haynesville, the outlook for pure gasoline costs to stay softer, longer.

With that market backdrop, we see two major impacts on ICD. First, the general Haynesville directed rig counts going to say no. We now have one buyer particularly who has knowledgeable us that they are going to be transferring to zero working rigs. A number of present prior and potential clients within the Haynesville are additionally terming their energetic rig plates. The impression to ICD’s Haynesville fleet will embody some rig relocations to West Texas, which have already commenced. Proper now, we’re assured that we might want to relocate 5 to six rigs, which can happen primarily throughout the second and third quarters of this yr. The method has already began with 1 rig relocating with none operational whitespace. And I’d be remiss if I didn’t level out that we acquired a day price enhance within the course of.

We’re within the last contract negotiations for our second relocation, which will even happen with minimal whitespace and a day price enhance. We imagine market demand and energy within the Permian for pad-optimal super-spec rigs in addition to our buyer base is robust sufficient to soak up rig additions to the basin. We’re already seeing some decrease spec rigs will get displaced on account of the churn underway. Additionally rigs introduced from the Haynesville into the Permian will truly take in rig depend progress alternatives beforehand reserved for rig reactivations. On this setting, we anticipate general rig reactivations to sluggish significantly and even cease till this general rebalancing course of is full and the market is settled. Thus, we now have elected to defer the reactivation of what can be our twenty second rig. General, throughout this course of, we anticipate the general super-spec rig market to stay sturdy and keep present utilization ranges, that are above 90% utilization.

As we now have talked about on prior calls, 80% utilization or above is often the place drilling contractors have been capable of keep and enhance pricing. However over the following two quarters or so, there may be going to be some choppiness as we reshuffle the deck on account of what’s occurring within the Haynesville, I anticipate there will likely be extra rig on rig competitors the place rig additions are occurring or a rig substitute alternative exists. This can have some impression on pricing. Principally, we might anticipate the tempo of day price margin acceleration to reasonable. In order we transfer previous the primary quarter and all the rigs have repriced to present market day charges, I anticipate day price and margin enchancment to flatten out for ICD after the primary quarter. Phillip will present extra monetary particulars on our outlook, however general, it means we are going to possible transfer sideways after the primary quarter for 1 / 4 or two till the market is rebalanced following rigs transitioning between basins.

We stay optimistic about market momentum starting to speed up once more in the direction of the again a part of this yr, primarily within the Permian based mostly upon our expectation that WTI will likely be increased within the again half of 2023. From a rig utilization perspective, whereas we relocate rigs to the Permian, we aren’t anticipating a serious discount in our general utilization price. We may have some rigs in transit, however we do anticipate to achieve full efficient utilization of our 21 rigs working within the fourth quarter or by yr finish. General, we might anticipate to function within the neighborhood of 19 to twenty common rigs throughout this yr, bearing in mind the transition time which may happen on rig relocations throughout the second and third quarter. Phillip will undergo extra of the main points, however financially our backlog of contracts within the Haynesville will mute a lot of the potential monetary impacts, whereas rigs are transitioning.

So how will all this impression ICD this yr and strategically? General, we don’t anticipate it is going to have a cloth general impression apart from to postpone rig reactivations. All of ICD’s strategic and monetary targets concerning producing important free money stream and decreasing general leverage stay intact. As Phillip will talk about, we nonetheless anticipate 2023 to be a report yr for ICD from a income per day, margin per day, EBITDA and free money stream perspective. In actual fact, within the near-term as we sluggish our capital investments and extra rig reactivations, our free money stream and web debt discount plans will speed up as we enhance our working capital place by placing some money on the stability sheet.

Strategically, we stay very centered on making a pathway in the direction of steadily lowering our web debt place as we transfer in the direction of the refinancing window for our convertible notes. One in all our long-term targets is to scale back our web debt to adjusted EBITDA ratio meaningfully in the direction of the vary of lower than 1x to 1.5x throughout the refinancing window involving our convertible notes. For reference, we’re presently at 2.5x levered on an annualized foundation utilizing our fourth quarter outcomes. And based mostly upon the market expectation I simply described, we anticipate to exit 2023 round 2x or beneath using the identical metric. So, whereas we now have some work to do on this regard, every little thing is in place for ICD to attain its brief and long-term monetary and strategic targets.

I’ll make some extra concluding remarks. However proper now, I wish to flip the decision over to Phillip to debate our monetary outcomes and outlook in a bit of extra element.

Philip Choyce

Thanks, Anthony. We have been basically breakeven from a profitability standpoint within the fourth quarter. Throughout the quarter, we reported an adjusted web lack of $87,000 or $0.01 per share and adjusted EBITDA of $18.5 million. Reported adjusted EBITDA elevated sequentially 48% in comparison with the third quarter of ‘23. Adjusted web loss and revenue excludes the impression of a tax profit acknowledged throughout the fourth quarter following completion of our evaluation concerning the deductibility of curiosity expense underneath our convertible notes.

We operated 18.5 common rigs throughout the quarter, representing a 6% enhance in comparison with the third quarter. Anthony beforehand talked about our fourth quarter income and margin per day have been quarterly data for ICD. Income per day of $32,778 represented a 14% enhance in comparison with the third quarter and margin per day of $14,517 represented a 28% sequential enhance in comparison with the third quarter metrics.

SG&A prices have been $7.7 million, which included roughly $1.9 million of stock-based and deferred compensation expense. Sequential will increase in money SG&A over the third quarter have been pushed by increased incentive compensation accruals based mostly upon enhancements within the firm’s security, operational and monetary efficiency in comparison with efficiency targets.

Curiosity expense throughout the quarter aggregated $8.6 million. This included $2.4 million related to non-cash amortization of deferred issuance prices and debt reductions, which have been excluded when presenting adjusted web revenue and loss. Throughout the quarter, money funds for capital expenditures, web of disposals have been roughly $18.8 million on this CapEx out roughly 79% associated to rig reactivations and upgrades and 21% associated to upkeep CapEx.

Transferring on to our stability sheet, adjusted web debt was $182.5 million at quarter finish. This quantity represents the face quantity of our convertible notes and borrowings underneath our ABL and ignores the impacts from debt reductions, deferred financing prices and finance leases. I do wish to level out that the adjusted web debt we reported this quarter additionally consists of accrued curiosity at yr finish that we intend to pay in time when due in March of 2023. Our backlog at yr finish was $79.1 million, with a median day price over $35,000 per day. Our monetary liquidity at quarter finish was $26.6 million comprised of $5.3 million of money readily available and $21.3 million obtainable underneath our revolving credit score facility.

Now transferring on to steering for the primary quarter and a few gadgets associated to fiscal 2023. Let me begin with the primary quarter. We anticipate working days to approximate 1,715 days, representing roughly 19 common rigs working throughout the quarter, reflecting some rigs starting to transition from the Haynesville to the Permian. Our twenty first rig is just not anticipated to reactivate till the second quarter. We anticipate margin per day to come back in between $15,500 per day as Anthony talked about. We anticipate income per day to come back in between $33,200 and $33,600 per day. Price per day is anticipated to vary between $18,100 and $18,400 per day.

Unabsorbed overhead bills will likely be about $600,000 and aren’t included in our value per day steering. We additionally estimate roughly $800,000 of transition bills related to rig relocations to the Permian, principally associated to crew carrying prices throughout the transition interval and unreimbursed transportation prices. We anticipate first quarter money SG&A expense to be roughly $5.9 million and stock-based compensation expense is anticipated to be roughly $2 million on prime of that. We anticipate curiosity expense to be roughly $8.8 million. Of this quantity, roughly $2.4 million have been associated to non-cash amortization of deferred financing prices and debt reductions. Depreciation expense for the primary quarter is anticipated to be $11 million.

As Anthony talked about, we will likely be transitioning rigs from the Haynesville to the Permian. That course of has already begun and we presently anticipate it to happen over the second and third quarters of 2023 with most motion throughout Q2. Though as Anthony talked about, our first relocation occurred with minimal non-operating days. There could possibly be some transitional time between contracts. Though we are going to look to reduce these durations, it’s depending on the timing of our Permian clients drilling applications. So, our inner planning processes are budgeting that we generate income on roughly 17, 18 common rigs throughout the second quarter, roughly 19 to twenty rigs within the third quarter, after which we resumed full efficient utilization of our 21 reactivated rigs within the fourth quarter by yr finish. We are going to incur transitional prices related to relocating the rigs, anticipate to take care of crews because of the brevity of this transition interval. We presently estimate complete transition value related to this train to be roughly $3 million to $4 million, with the vast majority of it occurring throughout the second quarter of 2023.

And transferring on to steering referring to fiscal 2023 as a complete, general, our SG&A funds for 2023 is $27 million comprised of $18.5 million of money SG&A and $8.5 million of stock-based and deferred compensation expense. There’s a element of stock-based compensation that’s variable and tied to the worth of our frequent inventory for accounting functions. So, it will likely be some variability in that metric based mostly on adjustments in our inventory worth on the finish of every reporting interval throughout the yr.

Capital funds for 2023 is $30,400,000 web of disposals. It doesn’t assume that we reactivate our twenty second rig, which Anthony talked about we now have postponed. Breaking out our capital funds $4.5 million pertains to the reactivation and improve prices principally related to reactivation of our twenty first rig, $21.5 million pertains to upkeep CapEx and different issues, and $4.4 million pertains to deliberate tubular purchases. For 2023, we anticipate our general efficient tax price to be 20% though we don’t anticipate to be money federal tax revenue there. For weighted common shares excellent in durations of web revenue, our absolutely diluted shares excellent will embody the shares related to assumed full conversion of the convertible notes.

And with that, I’ll flip the decision again over to Anthony.

Anthony Gallegos

Thanks, Phillip. Earlier than opening the decision up for questions, I wish to briefly summarize ICD’s strategic positioning and what I feel all of it means for ICD’s stockholders. Final yr, we considerably reworked our firm and positioning. By way of our positioning, I take into consideration three vital info. First, our utilization and margin progress popping out of the pandemic has been finest at school. This speaks to the standard of our individuals, our property and our efficiency. Additionally, right now, our every day rig margins are the perfect in ICD’s historical past and are on par with and exceeding a few of our bigger firm friends as we proceed to earn recognition from our clients for trade main customer support and professionalism. The corporate has by no means carried out higher.

Second, we now have the youngest and we imagine the best-in-class rig fleet. The marketplace for pad-optimal super-spec rigs stays robust exterior of the gasoline pushed foundation. We proceed to show our fiscal self-discipline by securing contracts that earn full easy payback on the reactivation CapEx we’re investing and by deferring additional investments in extra reactivations past the twenty first rig, which can come out early this yr till this market settles out. And eventually, we now have considerably improved our liquidity and stability sheet and anticipate significant enhancements and leverage ratios and different debt metrics as we transfer by 2023 and past.

Though softness in gasoline markets will impression the tempo of rig reactivations and would require us to reposition some rigs, ICD has by no means been in a greater place to navigate a majority of these short-term challenges. Our operational energy and popularity with our clients has by no means been stronger. Our fleet which has been reworked by the market penetration of our 300 sequence rigs and our capacity to market and full 200 to 300 sequence conversions has by no means been extra priceless. From a income per day, margin per day, EBITDA and free money stream perspective, the outlook for ICD to enhance these metrics in 2023 is undamaged and in some ways will speed up.

To summing all this up, ICD checks all of the containers, whether or not you’re searching for best-in-class property, main rig margins or an impressive buyer base in rigs centered on crucial oil and gasoline shale performs in U.S. and standard, ICD delivers on these metrics. With all this in place, we’re poised to generate significant free money stream throughout 2023, which we imagine will work towards closing the inventory valuation hole between ICD and our friends as we proceed to execute upon ICD’s strategic initiatives.

With that, operator, let’s go forward and open up the road for questions.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] Right this moment’s first query comes from Don Crist with Johnson Rice. Please go forward.

Don Crist

Good morning, gents. How are you all this morning?

Philip Choyce

Good, Don.

Anthony Gallegos

Good morning, Don.

Don Crist

Anthony, I needed to start out with clearly the macro could be very topical as of late. And it’s the competition amongst analysts and the investor neighborhood that the rig depend goes to get a bit of bit weak in the direction of the summer time probably, however then enhance as we go into the autumn. And the genesis of my query is what can we appear to be in 2024? All of us suppose that it’s going to be weak in ‘23. But when gasoline directed drilling comes again to an identical degree to the place it’s right now. Might we discover ourselves in a rig scarcity alternative there and potential for increased day charges as we go into ‘24 as that Haynesville or gasoline directed drilling will increase?

Anthony Gallegos

Sure, Don. That’s precisely what we see over the following 12 to 24 months, the place – on a geographic foundation, the place you’ll possible see a rig depend decline is within the Haynesville. And hear, I’m speaking about our goal markets of Texas and the contiguous states. Primarily based on our dialog, actually, the negotiations that we now have been within the final couple of months, we see the Permian comparatively flat right here within the first half of the yr. What’s attention-grabbing is once we discuss to clients in regards to the again half of the yr and rolling into 2024 most of them are speaking to us about incremental provides. Within the short-term, there may be some high-grade alternatives the place some decrease spec rigs are getting modified out. After which there’s a tranche of E&Ps that perhaps haven’t been busy which might be choosing up rigs and that’s the place we’re discovering alternatives right now. I’m inspired by the truth that we aren’t having to take a deep low cost in day price to have the ability to place these rigs. One different anecdote I’d share with you is even within the Haynesville, that is true once we discuss to our clients who perhaps decreasing exercise ranges, they’re working very, very onerous to ensure that they preserve their individuals. And that’s a fairly robust sign to me that they anticipate exercise to pickup perhaps a bit of prior to the general market perhaps anticipating. So no, I feel it’s a comparatively flattish sort rig depend within the first half of the yr starting Q3, This fall, I start – I feel it begins to tick up. Everyone knows how tight it was within the fourth quarter of final yr. And I feel that’s the setting that we’re again in in all probability prior to individuals understand.

Don Crist

And also you touched on it within the feedback a second in the past are you able to simply speak about pricing? We now have heard a few anecdotes of E&Ps – bigger E&Ps which might be working a number of rigs sort of going again to operators and securing 5% or 10% reductions, however that also equates to 50% margins. Are you seeing any sort of haggling there on worth?

Anthony Gallegos

Haven’t had any clients come to us and ask for a day price discount. We had positioned fairly a couple of of our rigs and particularly the rigs within the Haynesville to rollover right here within the second quarter anyway, which was going to offer us a possibility to extend charges a bit of extra. Simply to offer you some a really feel for what we’re seeing day charges are perhaps there are 1,000, 2,000 a day lower than we might have thought they’d be presently of the yr in comparison with if I – after I answered that query, the final time we had a name, not a catastrophe by any means. As you stated, margins are nonetheless very, very robust. Phillip simply offered some steering on what we see right here within the first quarter and even within the quarters past when it comes to it being comparatively flattish.

So I feel one factor, Don, that in all probability isn’t appreciated as a lot because it ought to is the advantages that the super-spec rig fleet supplies our clients. I used to be at a dinner final week right here in Houston and was speaking with a CEO of an E&P firm. In fact, I’m in gross sales mode, proper. I’m all the time in gross sales mode. And he’s telling me that he has taken benefit of a possibility to pickup a few super-spec rigs and exchange some lower-spec AC rigs that he had working. And the remark he made was already on the primary pad, they’re seeing the advantages of the super-spec tools. And I’d level out for our buyers that, that’s 100% of our fleet super-spec pad-optimal. And after I take into consideration rigs transferring into the Haynesville, in fact, we’re going to transfer a couple of in, we now have talked about that. We actually suppose it’s the SCR rigs which might be working and the lower-spec AC rigs which might be working that’s going to bear the brunt of the flattish rig depend with the growing provide.

And I’d shut with this remark, Don and you realize this, bear in mind how small the rig value is and the whole value of a effectively. So day price since – I imply, look, our clients should do their job and ensure they’re spending cash properly. However once you take a look at the standard Permian effectively, a 15-day effectively, that value $6 million to $8 million, the rig is lower than 10% of that. So I’d query simply how delicate they are going to be or how delicate the day charges will likely be to the general economics of what they’re doing.

Don Crist

I admire all the colour. I’ll leap again in queue. Thanks.

Anthony Gallegos

Sure, certain. Thanks, Don.

Operator

The subsequent query comes from Steve Ferazani with Sidoti. Please go forward.

Steve Ferazani

Good morning, everybody. Admire all of the element on the decision this morning. Loads of information right here. I do wish to comply with the earlier questions when it comes to your confidence degree which you can get 5 of your Haynesville rigs into the Permian given there will likely be some competitors there and is that your pondering that there’s so many rigs, however are you able to exchange drilling applications simply you will have a greater rig or how are you fascinated by that? It simply appears difficult to suppose that many rigs can transfer over to the Permian at related day charges.

Anthony Gallegos

Sure and thanks for the query, Steve. I do suppose we’re going to achieve success. In actual fact, 2 of the 5, 1 is already basin. And the second we signed the contract this morning for. So it’s going to start out transferring subsequent week. And once you examine what its day price was and within the Haynesville to what it’s going to earn on the brand new contract, it’s a rise in day charges. In order that’s 2 out of the 5 proper there. We now have obtained a pair extra which might be going to come back to me right here within the first a part of the second quarter. Workforce is doing an awesome job. However look, it’s a perform of getting the precise tools, the super-spec pad-optimal tools. It’s a perform of the popularity that ICD has in each basins. We’re very concentrated when it comes to our goal market. I feel everyone is aware of that. The Permian and Haynesville are house markets for us. Sure, we now have labored in Eagle Ford. Sure, we’ve labored in different within the Chalk. However these two basins are house for us the place we now have a really robust popularity.

And as you realize, Steve, none of that might be attainable if it wasn’t for the onerous work and dedication of our individuals, so sure, I’m very optimistic that we’re going to achieve success in doing that with out having to considerably drop day charges. Within the course of, we’re solely speaking about 5 rigs, proper, in a 300-rig market. And like I stated, we posted a PowerPoint this morning. And Phillip did some actually good evaluation on the market. There’s a slide there. I referred to it because the Pac Man slide, the place we now have put some evaluation to this query. And the way in which we take a look at it within the Permian, there may be roughly 40 of what we might name decrease spec AC rigs. After which there may be about two dozen SCR rigs which might be working. I’m ignoring the mechanicals as a result of we’re in all probability not the precise software for the work that the mechanical rigs are using. However for those who noticed on each of these up, that’s 60ish rigs. That ought to be excessive grade alternatives for the super-spec pad-optimal fleet that we now have. And like I stated, we’re solely transferring 5. I don’t suppose you will see a mass exodus of rigs out of the Haynesville. Actually, we’re going to transfer a handful. I believe some others may transfer a couple of. However sure, I’m very assured we’re going to have the ability to do that. Are we going to have the ability to transfer all 5 with out a single day of whitespace? Hopefully, we will. However I’d assume there’s a small break in a single or two of these. However we expect that we sort of hit the underside when it comes to that transition right here within the second quarter. However actually, by the top of the yr and I’d hope inside the fourth quarter, we’re again to twenty rigs run – 21 rigs working and place for what ought to be a extremely good 2024 when you consider the macro.

Steve Ferazani

Wonderful, glorious. Admire the reason. And for those who can simply stroll by a bit of bit when it comes to the mobilization time how you’re paid, I do know Phillip gave some element on pricing the typical rig depend in 2Q after which a few of the prices, however when it comes to the downtime as you progress the time it takes to maneuver from Haynesville to Permian now, the way you receives a commission throughout that interim, just a bit little bit of element there to elucidate it to everybody?

Anthony Gallegos

Sure. Steve, it’s actually a protracted rig transfer is what it’s. And look, we – a 1 yr, 1.5 yr in the past, we have been transferring rigs from Permian to Haynesville and now we’re going again. So the complete time to have an effect on that mobilization is 7 days, 10 days. Our contracts within the Haynesville have demobilization provisions. There may be sometimes a demobilization charge. Generally that that’s again to Houston, typically there’s a lump-sum. And what we’re doing to mitigate the monetary impression is taking the demote charge that we might obtain to deliver the rig again to Houston. To the extent, we now have to prime it off to pay all the trucking, we’re doing that. And it’s actually not as huge of a monetary hit as you may suppose. I feel the place the publicity is, is that if we aren’t profitable transferring them straight from one location to a different, in different phrases, contract to contract and there may be idle time, as a result of we see this as a comparatively short-term phenomenon, our plan is to maintain the crews. And so you’ll incur the crew value. However like I stated, we now have signed two contracts to this point optimistic that we’re going to get all of them executed and mitigate that, however that might be the work publicity. Is it truly is it the crew value? Phillip, you wish to something?

Philip Choyce

Sure. For the rigs, once we are profitable going sort of on these first two, there was actually no, I imply, simply apart from a protracted rig transfer, there have been no incremental transportation prices and actually no incremental crew prices. So to the extent we’re profitable going from contract to contract sort of direct continuation that $3 million to $4 million steering we gave for those who go to zero, it’s going to be onerous to do this on all 5. So we’re in all probability a bit of forward proper now on the place we thought we might be with these first two. And so we are going to simply have to attend and see. Nevertheless it’s not an enormous monetary. The rig strikes a small a part of it. The largest half is simply how we deal with the crews if there’s a month or two of whitespace between contracts.

Steve Ferazani

Make sense. Thanks for that. Final one for me when it comes to how you’re dealing with the toggle notes now, it feels like you’re saying – you’re switching, are you going to be paying money curiosity with out given the restricted CapEx you at the moment are anticipating this yr or the lower than you’re beforehand?

Philip Choyce

Sure. So, we had beforehand guided to we might begin paying money curiosity in March. I feel we might take a look at doing that March of 2024. I feel what’s on the desk now’s we might begin paying money curiosity starting of September. I feel for those who take a look at our working capital, we have to enhance that and that’s beginning now. And we now have obtained some gadgets associated to the rigs reactivated, and at 12/31, we’re going to pay that after which we are going to look to extend our money stability. And we are going to make the choice in September whether or not to select curiosity for that, or pay money at that time limit. The opposite sort of factor that’s obtainable to us is, underneath the indenture, the necessary presents we began providing to pay again at par starting in June of this yr, $5 million 1 / 4 of notes. I don’t know whether or not the be aware holders will besides that or not, however that will likely be a use of money, that can assist de-lever the corporate as effectively in the event that they settle for these presents. So, there may be a few various things transferring there.

Steve Ferazani

Nice. Philip, Anthony, thanks for the responses this morning.

Anthony Gallegos

Sure, sir. Thanks, Steve.

Operator

The subsequent query comes from Dave Storms with Stonegate Capital Markets. Please go forward.

Dave Storms

Good morning. Admire you all taking my name. So, simply beginning with the delta between the 200 rigs and 300 rigs. I believed I bear in mind proper, within the final quarter there may be roughly 2,500, wasn’t you certain if that has modified, now with the market altering, you’re transferring rigs from Haynesville to the Permian?

Anthony Gallegos

No, I don’t suppose it’s modified. Dave, the one factor that has modified and its constructive is within the fourth quarter, we have been profitable in changing a type of from 200 sequence to 300 sequence. And that was very, crucial for us, as a result of we would have liked to show it technically, but in addition show it commercially that, look, we’re making the capital funding that – and it’s very modest quantity, proper. I feel we stated $650,000, that we truly can earn and return on that. And we ticked all of these containers with that conversion. So, because the advertising and marketing group is sitting right here right now, and fascinated by the location of the rigs that we’re transferring, for instance, that are predominantly 200 sequence rigs, they’ve that optionality. In different phrases, that’s an choice to the extent that the shopper wants the improved racking capability and is keen to pay for it, we will do this. However I feel simply the 2 that we now have already moved and contracted, present that the 200 sequence rigs within the Permian Basin, aside from the little little bit of softness, I discussed a second in the past on the decision, is just about held up.

Dave Storms

Okay. Good. Thanks. Are you seeing any clients not wish to do the conversion simply because the 200 spec rigs meet all their – every little thing that they want?

Anthony Gallegos

Sure. We’re. And in reality, we’re seeing the other too that the one rig that we transformed again in November has been working for an operator. It’s one, if not the largest non-public operator within the Permian Basin. They love every little thing about that rig. I don’t suppose they’d ever let it go. However once we made the pitch to them that look, okay, if you wish to drill an additional couple thousand toes of lateral, here’s a rig that you realize what, you find it irresistible, it’s a effectively performing rig. We are able to make this enhancement to it, however you will should pay for it. They usually stated sure, let’s do it. And that was the primary one we did. However no, they’re these – the 200 sequence rigs, they’re super-spec, they’re pad-optimal, three mud pumps, 4 Gen. They’re on-line managed. They’re Ferraris. And they’re very, very fast-paced. So, you consider work, for instance, within the Midland Basin, the place we’re drilling 10-day wells. And we drilled 4 wells on a pad and we moved, rig transfer time could be very, crucial to the shopper. So, they’ve their benefits, their clients that love them, and we’re simply given them a possibility to like them much more, however we now have to receives a commission for it.

Dave Storms

Completely, that’s nice coloration up. Another if I might, and I do know you talked about that you’re not anticipating a mass exodus from Haynesville. However you probably did point out that you’re anticipating to see different operators transfer out? Are you seeing any competitors for logistics or the equipment tools wanted for the transport transferring to Permian?

Anthony Gallegos

No, we haven’t. And we haven’t but, Dave. One of many issues that that Philip and I are taking a look at for instance is, trucking value. If we have been going to see a mass exodus of rigs, out of the Haynesville going into the Permian, you’ll anticipate trucking to turn into tighter and the fee to go up. And in reality, we have been speaking proper earlier than the decision the most recent rounds of bids, the prices are literally lower than the 2 that we now have – the one which we now have already moved and the one which we’re about to maneuver. So, it provides me a bit of bit extra confidence that there’s simply – there may be not a mass exit of rigs out of the Haynesville.

Dave Storms

That’s good. Thanks very a lot.

Operator

The subsequent query comes from David Marsh with Singular Analysis. Please go forward.

David Marsh

Thanks for taking the questions. Good morning guys.

Anthony Gallegos

Hello. How are you?

Philip Choyce

Good morning Dave. Thanks.

David Marsh

So shortly on, I actually admire the commentary about decreasing leverage right here as we transfer ahead. I do know you guys simply took a possibility in September to push out the ABL to 2025. However because the numbers are available in, and leverage continues to say no, would you probably take one other take a look at that and perhaps revisit rigs on that settlement?

Philip Choyce

On the ABL, we might, sure. Actually, we’re all the time going to be searching for alternatives to scale back our prices.

David Marsh

Nice. And I imply…

Philip Choyce

I wouldn’t predict it utilizing that, and we wouldn’t use that. We weren’t – we in all probability wouldn’t be utilizing our ABL a lot in a debt discount that we’ll in all probability be paying that to zero right here this yr. And in order that’s not going to be a big value to us going ahead.

David Marsh

And I’ve been a bit of out of contact with the market, however are there any restrictions in your capacity to probably repurchase any of those converts within the open market, ought to the market current that chance to you?

Philip Choyce

Sure. So, the converts are intently held by two holders. The indenture wouldn’t permit. We must negotiate that with the 2 holders.

David Marsh

Received it.

Philip Choyce

We do have the necessary redemption provisions the place we make a proposal to them starting in June. And we might purchase these, it’s $5 million 1 / 4, and we might purchase these notes again at par. I don’t know whether or not they’re going to settle for these or not. It’s at their choice, however we do make these presents to them starting in June of this yr.

Anthony Gallegos

We’re actually hopeful, they’re going to settle for the redemption supply, that you simply guys know, we’re very centered on doing the issues essential to deliver the leverage down on the corporate. I feel we’re on a glide path to do this. So, the earlier we will make progress. Actually on a net-net foundation, we’re going to do it anyway. However the sooner we will make progress and truly taken out notes, the higher in my thoughts.

David Marsh

Completely. Properly, congrats once more on the quarter and good luck going ahead. It sounds such as you guys are on an awesome path.

Anthony Gallegos

Nice. Thanks, Dave.

Operator

The subsequent query comes from Jeff Robertson with Water Tower Analysis. Please go forward.

Jeff Robertson

Thanks. Good morning. Anthony, on Slide 22 of the deck you posted this morning, you will have your backlog and spot market publicity. Are you able to discuss in regards to the impression of rig transitions to the Permian? And the way that can impression re-pricing as you look into ‘23 and ‘24, I’m sorry, third quarter and fourth quarter, if you end up just about uncovered to the spot market?

Anthony Gallegos

Sure. We made the choice within the second quarter of final yr to place some backlog on the books. As you may bear in mind, Jeff, we did that. Fourth quarter was about positioning our contracts to make the most of what we thought was going to be growing commodity costs this yr, and the exercise that that might spur alongside. That’s why you will have seen the backlog degree come down that mixed with the truth that there may be not quite a lot of 1 yr contract alternatives on the market. Proper now, it’s extra six months, or pad-to-pad, which is okay with the place the market is and what we’re doing. So, we expect it’s going to take a few quarters for this to shake out. I feel the place you see the following inflection level goes to be within the fourth quarter round 2024, CapEx applications as our clients start to execute on these. However they’re – simply going to sort of transfer sideways right here for the following couple of quarters. And also you take a look at the place we’re right now when it comes to margin technology, that the steering that Philip offered as effectively. That is nonetheless going to be a fairly good yr for ICD. It’s going to be good from an EBITDA perspective, however extra importantly, from a free money stream producing perspective. And the truth that we now have made the choice and we now have introduced to you guys now that the twenty second rig is just not going to occur this yr, tells you that issues that Philip talked about a second in the past about enhancing our working capital, ensuring that we now have money to redeem these notes when the chance presents itself to deliver the leverage down within the firm, all that’s truly being accelerated as this yr is taking part in out.

Jeff Robertson

Once you transfer rigs to the Permian, the remaining three, I’m sorry, put to the Permian, the remaining three rigs that you’ve got in Haynesville that you simply want to transfer. Are you – you’re ready on contracts to maneuver these in order that they go to work instantly, is that appropriate?

Anthony Gallegos

Properly, they’re all working right now, Jeff. We don’t have any idle rigs. So, we now have obtained to complete off the dedication that we now have right now within the Haynesville and that’s going to occur right here within the second quarter. And because the – so our objective can be as we end the one contract within the Haynesville, we wish to have a contract within the Permian, that hopefully we’re capable of transfer pad-to-pad. And that’s what we did with the primary one. That’s what we’re about to do with the second. Hopefully, we are going to do this with all them.

Jeff Robertson

After which lastly, is there a lot of a margin distinction between working rigs within the Permian versus the Haynesville?

Anthony Gallegos

We expect there’s a little little bit of a margin enchancment once we work within the Haynesville. It’s a perform of longer wells when it comes to period, you’re on pads longer, some issues like that, but it surely’s not important.

Jeff Robertson

Okay. Thanks.

Anthony Gallegos

Sure. Thanks, Jeff.

Operator

The subsequent query comes from Dick Ryan with Oak Ridge Monetary. Please go forward.

Dick Ryan

Thanks and congratulations on a great quarter. So, most of my questions have been requested, however I used to be taking a look at your Pac Man chart, Philip and Anthony. What motivates the operator to pay the next day price if you end up bringing these issues into the Permian? And does that permit you any flexibility on discussing phrases for these new contracts?

Anthony Gallegos

Sure. On the primary level, you bought to recollect that there have been a number of operators final yr, that might have favored to contract a rig, like we’re speaking about, one thing that’s tremendous spec and pad-optimal, all of the bells and whistles, earlier than configuration the entire. However due to the market tightness, they weren’t capable of. So, that’s a really logical and apparent goal for the rigs that we’re bringing over, as a result of they meet the – what I simply described to know we…

Philip Choyce

Sure. When you recall, the one manner you would get us, within the fourth quarter to get an excellent, a further rig was to take our rig on stack or reactivation. And all of our intelligence and what we’re seeing is, that’s an $8 million to $10 million funding by the drilling contractor, we’re requiring contractual payback, quite a lot of operators simply couldn’t for lots of various causes have been keen to signal a yr or longer contract that might require that. So clearly, these alternatives, they’ve a possibility to take a rig that perhaps they didn’t – perhaps didn’t have an opportunity to take earlier than. After which clearly, after the market settles, if the rig depend does tick-up once more, they are going to be again and in the event that they want incremental rigs, and they’re going to have to come back again out from reactivation. So, we must see when that happens.

Anthony Gallegos

Dick, I’d additionally add, our advertising and marketing group, Scott, Mark, they did an incredible job. And a few of the alternatives that we’re contracting right now with the rigs popping out of the Haynesville are alternatives that you simply wouldn’t see on any energetic buyer chart. So, there are guys that wound down a program within the first half of final yr they have been idle, or perhaps they couldn’t get their palms on a super-spec rig within the again half of the yr. And now we’re in a New Yr, new funds season. Like stated, the fellows did an awesome job, stayed in contact with a complete big selection of shoppers. And we’re being very, very profitable there. Along with growing the variety of multi-rig purchasers that we now have guys that we now have been working for, which have perhaps an underperforming rig, not a rig of ours, however another person’s. And okay, we go to them with a sister rig, like what’s already there. And we now have been capable of execute that right here within the first a part of the yr. Like I’ve stated, it’s sort of churn within the basin, so that you received’t see it. However as we glance out over the following couple of quarters, we’re going to look to attempt to create extra of these sorts of alternatives like that. And we’re in some fairly good discussions proper now round these alternatives.

Dick Ryan

Okay. Nice. Thanks and congratulations.

Anthony Gallegos

Thanks a lot Dick.

Operator

The subsequent query is a follow-up from Jeff Robertson with Water Tower Analysis. Please go forward.

Jeff Robertson

Thanks. Anthony, you talked about the refinancing window for the decide notes. However are you able to simply discuss in regards to the choices that going into that window with a lot stronger stability sheet as you talked earlier, push the twenty first activation out and construct money and enhance the metrics on the stability sheet? What sort of choices that provides you with as you consider options to refinance the notes into one thing a bit of extra standard?

Anthony Gallegos

Sure. We’re sort of restricted in what we will do proper now exterior of negotiating one thing with our collectors, our collectors or nice companions, Jeff. As you realize, we put the convertible be aware in place, about this time final yr. And we wish to – we’re going to should construct money. And we’re going to should make the most of these necessary redemption alternatives that we now have. And ensure that we proceed to construct money as we enter this defeasance interval and…

Philip Choyce

So, that the charge – that interval begins in September of 2024, so early, after which there’s a make-whole underneath the phrases of that. So, it’s fairly costly to do it at that time limit. So, we must take a look at what’s obtainable to do this at that time limit and wouldn’t it make financial sense. As we transfer nearer to maturity, they will get cheaper. So, it’s onerous to say now, what alternatives will lie forward. And what options there will likely be till we see what the market seems to be like, and likewise depends upon what the be aware holders are thinking about doing as effectively. However so far as the phrases of the indenture, it’s start September of ‘24. And that’s when the window opens up. However there may be the make-whole. So, it’s fairly costly at September, and it will get cheaper as we transfer nearer to maturity.

Anthony Gallegos

And Jeff, I’d simply add, I imply I’m so glad that we’re capable of give Philip a headache, fascinated by these sorts of issues now. It’s a perform of simply every little thing that we now have labored so onerous to perform during the last couple of years. We needed to get to an working scale, one the place we will survive the bumps and bruises {that a} cyclical trade like ours presents. However extra importantly, in order that we had working scale to have the ability to, like critically take into consideration these sorts of issues and have these sorts of discussions. I hope what everyone has taken away from this name is that that is going to be a fairly good yr for ICD, and perhaps not the yr that all of us thought three months or 4 months in the past. However when you consider ensuring, we’re making progress down the pathway of with the ability to accomplish our long-term targets this 2023 regardless of any softness popping out of the Haynesville remains to be going to be a fairly good yr in the direction of making that progress.

Jeff Robertson

Taking a look at Slide 27, the de-leveraging profile simply when it comes to the leverage ratio, as you transition rigs, it looks as if a fairly robust testomony to the energy of the enterprise?

Anthony Gallegos

Sure, sir. Thanks. I’d agree.

Operator

This concludes the question-and-answer session. I want to flip the convention again over to Anthony Gallegos for any closing remarks.

Anthony Gallegos

Properly, thanks MJ. Look, I hope as everyone has heard right here, there are such a lot of good issues happening right here at ICD. I wish to ensure that I say thanks to all the group members right here, particularly these across the rotary tables the place the work will get executed. Clearly, we’re very, very enthusiastic about 2023, wanting ahead to updating you on our progress once we report our first quarter outcomes right here, fairly quickly. So, till then, we wish to want you all security and success in your endeavors and we are going to sign-off now. Thanks.

Operator

The convention has now concluded. Thanks for attending right now’s presentation. You might now disconnect.