Stonegate Capital Partners Updates Coverage on Independence Contract Drilling, Inc (NASDAQ: ICD) Q4 2022

DALLAS, TX -- March 6th, 2022 -- Independence Contract Drilling, Inc (NASDAQ: ICD): Stonegate Capital Partners updates coverage on Independence Contract Drilling, Inc. The full report can be accessed by clicking on the following link: https://stonegateinc.com/reports/ICD_Q422.pdf

COMPANY UPDATES

• Overall market outlook remains strong: Management noted that the overall market for super spec rigs remains strong with greater than 90% utilization across the asset class. Utilization above 80% typically gives operators the ability to push prices. This gives the Company confidence that they will be able to expand margins in FY23, despite the headwinds from declining natural gas prices.
• Operating days and Margin increasing: ICD exited 4Q22 with 20 rigs operational and an average rig count of 18.5. With dayrates averaging $32,778 and margins of $14,517 the Company saw revenue growth of 111% year over year and sequential Adjusted EBITDA growth of 48%. ICD ended 4Q22 with a backlog of $79.1M, all of which is expected to be realized in 2023.
• 4Q22 results end in-line with estimates: ICD reported revenue, adj EBITDA, and Basic EPS of $60.3M, $18.5M and $0.25, respectively. This compares to our/consensus model of $60.0M/$56.5M, $17.1M/$15.4M, and $(0.07)/$(0.24), respectively. Both revenue and GPM were higher than expectations due to significantly higher margins than forecasted. Operating expenses were higher than expected resulting in EBTIDA that was mostly in-line with our forecast.
• Headwinds in Haynesville market: As noted above, the Company, along with the rest of the industry, is seeing softness in natural gas prices. This is reducing drilling activity in the Haynesville market, where the company operates. To navigate this challenge ICD is moving rigs from the Haynesville location to the Permian Basin. This operation is expected to be completed before the end of 2023, with minimal downtime. Due to this challenge management has paused their reactivation of the 22nd rig with the 21st rig reactivation planned for 2Q23.
• Debt Goals in focus: Given the challenges in the Haynesville market leading to a pause in rig reactivation, the Company is planning to reallocate the FCF that would have been used for rig reactivation to improve their balance sheet. Management is guiding towards a leverage ratio of 2.0x before the end of 2023.
• Valuation – We us both an EV/EBITDA and EV/Rig comparison to value ICD.
• ICD is trading at 2.0x estimated FY24 EV/EBITDA compared to the median of 3.6x. Using an EV/EBITDA multiple range of 2.5x to 3.0x, with a midpoint of 2.75x, results in a valuation of $4.55 to $7.58 respectively, with a midpoint of $6.07.
• ICD currently has 26 marketable rigs and is trading at a 7.6x EV/Rig multiple vs comps at 12.5x at the median. We believe the company should be trading in a range of 10.0x to 12.0x with a midpoint of 11.0x. This returns a valuation range of $5.46 to $8.68 with a midpoint of $7.07.