DALLAS, TX -- August 9th, 2024 -- Independence Contract Drilling, Inc.
(NYSE: ICD): Stonegate Capital Partners Updates Coverage on Independence Contract Drilling, Inc. (NYSE: ICD).
COMPANY UPDATES:
In 2Q24, ICD’s performance aligned with expectations amid ongoing challenges in the U.S. land contract drilling market, including high rig churn and increased customer fiscal discipline. These headwinds have continued into 2Q24, causing delays in rig reactivations and additional rig releases. ICD has expressed a strong focus on securing contracts for these rigs in the Permian and Haynesville/East Texas markets. ICD projects a reduction in the average operating rig count to around 13 for the third quarter. The Company anticipates regaining second-quarter levels by the end of 4Q24, assuming successful re-contracting.
Market Conditions Shed Light: The contract drilling market faced significant challenges in 2Q24 due to declining oil and natural gas prices. After reaching highs in early 2022, both WTI oil and natural gas prices have fallen sharply, leading to weaker market conditions in key areas like the Haynesville Shale. This has resulted in a reduction of operating rigs and a shift of resources to the Permian Basin. However, increased customer consolidation, higher drilling efficiencies, and tighter fiscal discipline have intensified competition and rig churn, impacting ICD's ability to secure contracts on favorable terms. As a result, ICD anticipates lower average operating rig counts and reduced revenue per day in the near term, despite relatively stable commodity prices.
Operating Days and Costs: In 2Q24, operating days decreased 4% q/q. This sequential decrease was primarily due to lower day rates on contract renewals, which fell 4.8% q/q, with the Company expecting a 2% decrease in Q3 day rates. Operating costs were $31.5M, including $0.3M for the Houston rig yard closure, with a subsequent $1.0M expected in Q3. Margins fell to $9,675 per day due to higher costs and lower day rates. SG&A expenses decreased to $3.7M, and interest expenses were $10.2M, including $2.9M in non-cash amortization. Accrued interest on Convertible Notes was $7.0M as of June 30, 2024.
Quarterly Results: ICD reported revenue, adj EBITDA, and EPS of $43.3M, $8.5M, and ($1.15), respectively. This compares to our/consensus estimates of $40.0M/$40.9M, $8.7M/$9.1M, and ($0.93)/($0.95), respectively. Revenue was higher than our expectations despite the challenging environment. The lower-than-expected rig count did lead to a difference of 390bps in GPM, as fixed cost absorption was a challenge in the quarter. Operating expenses were also above expectations due to lower-than-expected SG&A expenses, allowing Adj. EBITDA to remain slightly in line with our model.
Company Debt: As of 2Q24, ICD has elected to PIK its interest payment on its convertible notes due September 30, 2024 and expects to PIK the remaining interest payments thereafter. As this has increased the Company’s net debt level to $196.7M as of 2Q24, which is equal to ~112% of EV, management is continuing to evaluate strategic alternatives that may include a refinancing or recapitalization of the outstanding convertible notes. Due to the uncertain nature of this process, the Company has elected to suspend its quarterly earnings call.
Valuation – Due to the Company’s current debt headwinds we are suspending our valuation opinion until further notice.
