DALLAS, TX -- May 10th, 2023 -- Independence Contract Drilling, Inc (NYSE: ICD): Stonegate Capital Partners updates coverage on Independence Contract Drilling, Inc. The full report can be accessed by clicking on the following link: ICD Q1 2023 Report
COMPANY UPDATES
ICD began 2023 with a strong start, an 8% sequential improvement in margins per day and a 16% sequential improvement in adjusted EBITDA. Management noted that the overall market for super spec rigs remains strong with day rates expected to hold steady through the balance of 2023. While the Company has paused their new rig activation until the market becomes more suitable, this will give the Company an opportunity to strengthen their liquidity position.
- Operating Days and Margin Increasing: ICD exited 1Q23 with 21 rigs operational and an average rig count of 19.4. With dayrates averaging $34,870 and margins of $15,665. The Company saw revenue growth of 82% year-over-year and Adjusted EBITDA growth of 499% year-over-year. ICD ended 4Q22 with a backlog of $56.3, all of which is expected to be realized in 2023.
- 1Q23 Results Beat Estimates: ICD reported revenue, adj EBITDA, and adj diluted EPS of $63.8M, $21.4M and $0.14, respectively. This compares to our/consensus model of $61.9M/$61.6M, $17.7M/$19.2M, and $(0.31)/$(0.15), respectively. Both revenue and GPM were higher than expectations due to significantly higher margins than forecasted. Operating expenses were higher than expected, but margins were still in-line with our forecast. Due to the top line beat, EBTIDA came in above our model.
- Headwinds in Haynesville Market Remain: 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 until the market turns.
- Debt Goals in Focus: Given the challenges in the 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. We also note that ICD will offer to repurchase portions of their debt as is allowed with the exception that $15mn could be repurchased this year, with an additional $14mn next year. This offer will be at the discretion of the lenders.
- Valuation – We use both an EV/EBITDA and EV/Rig comparison for our valuation of ICD.
- ICD is trading at 1.9x estimated FY24 EV/EBITDA compared to the median of 3.2x. Using an EV/EBITDA multiple range of 2.0x to 2.5x, results in a valuation of $3.39 to $7.23, with a midpoint of $5.31.
- ICD currently has 26 marketable rigs and is trading at a 7.8x EV/Rig multiple vs median comps at 11.3x. We believe the company should be trading in a range of 10.0x to 10.5x. This returns a valuation range of $6.78 to $7.72 with a midpoint of $7.25.
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