DALLAS, TX -- February 29th, 2024 -- Independence Contract Drilling, Inc (NYSE: ICD): Stonegate Capital Partners updates coverage on Independence Contract Drilling, Inc.
COMPANY UPDATES
ICD continues to position itself for long-term growth while maintaining impressive operating results despite the softness seen in the market overall. The Company saw year-over-year revenue decrease by 24% and Adj. EBITDA decreased by 47%. Management noted that the Permian Basin market remains stable and is expected to strengthen in the back half of the year and into 1H25. In the quarter, ICD redeemed $5.0m of the convertible notes outstanding at par plus accrued interest. We do not expect any rig reactivations until 2H24 at the earliest while ICD spends the first half of 2024 focusing on stabilizing its rigs. Lastly, ICD has completed five rig conversions since the beginning of FY23.
- Operating Days and Margin: ICD exited 4Q23 with 17 activated rigs and an average rig count of 14.9. Dayrates averaged $31,508 and margins were $12,313. Revenues for 4Q23 were $45.8M, representing a 23.9% decrease as compared to revenues of $60.3M 4Q22. ICD ended 4Q23 with a backlog of $82.9M.
- Quarterly Results: ICD reported revenue, adj EBITDA, and EPS of $45.8M, $9.9M, and ($1.84), respectively. This compares to our/consensus estimates of $43.3M/$44.4M, $12.0M/$11.3M, and ($0.63)/($0.47), respectively. Both revenue and gross profit were in-line with expectations. Operating expenses were lower than expectations due to higher SG&A expenses, leading to slightly lower Adj. EBITDA.
- Headwinds in Haynesville Market: 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 has moved eight of its ten rigs out of the Haynesville market. We are encouraged by how efficiently the Company completed the transition of rigs from the Haynesville Market. We expect this market to rebound in 2025.
- Debt Goals in Focus: ICD ended the quarter with liquidity of $26.2M between the $5.6M cash balance and $20.6M revolver availability. Management continues to prioritize de-leveraging as a strategic priority, and we expect this to continue over the coming quarters. Management made clear that they are focused on the refinancing window that opens later this year for the Convertible Notes that are due in 2026 by appointing a special independent committee to begin the review and evaluation process.
- Valuation – We use both an EV/EBITDA and EV/Rig comparison for our valuation of ICD.
- We are using an EV/EBITDA range of 3.0x to 4.0x. To arrive at a valuation range of $2.81 to $7.31 with a mid-point of $5.06.
- When we apply an EV/Rig multiple range of 7.0x to 9.0x with a midpoint of 8.0x to ICD's 26 marketable rigs it arrives at a valuation range of $2.26 to $5.95 with a mid-point of $4.11.
