Independence Contract Drilling's (ICD) CEO Byron Dunn on Q4 2015 Results - Earnings Call Transcript

| About: Independence Contract (ICD)

Independence Contract Drilling Incorporated (NYSE:ICD)

Q4 2015 Earnings Conference Call

February 18, 2016 09:00 AM ET

Executives

Phil Choyce - SVP and CFO

Byron Dunn - CEO

Ed Jacob - President and COO

Analysts

James West - Evercore ISI

Connor Lynagh - Morgan Stanley

Rob MacKenzie - Iberia Capital Partners

Kurt Hallead - RBC Capital Markets

Daniel Burke - Johnson Rice

Brian Uhlmer - GMP securities

Operator

Good morning, and welcome to the Independence Contract Drilling 2015 Year-End and Fourth Quarter Conference Call. Just a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. At this time, for opening remarks and introduction I would like to turn the call over to Phil Choyce, Senior Vice President and Chief Financial Officer of Independence Contract Drilling.

Phil Choyce

Good morning, everyone and thank you for joining us today to discuss ICD's fourth quarter 2015 results. With me today is Byron Dunn, Chief Executive Officer of Independence Contract Drilling and Ed Jacob, President and Chief Operating Officer.

Before we begin, I would like to remind all participants that our comments today will include forward-looking statements which are subject to certain risks and uncertainties. A number of factors and uncertainties could cause actual results in future periods to differ materially from what we talk about today. For a complete discussion of these risks, we encourage you to read the Company's earnings release and our documents on file with the SEC.

Additionally, we refer to non-GAAP measures during the call. Please refer to the earnings release and our public filings for a full reconciliation of EBITDA and adjusted EBITDA and for definitions of our non-GAAP measures.

And with that, I'll turn it over to Byron for opening remarks.

Byron Dunn

Thank you Phil. Good morning, everyone and thank you for joining us today. As in prior calls, I will review ICD's fourth quarter operations and follow with thoughts on what we expect during the first quarter and some observations on the environment we anticipate during 2016. Phil will provide details on our fourth quarter financials and then we'll take questions from call participants.

Despite continued commodity price pressure in a continuing where levels declined in the North American rig count, ICD's fourth quarter results were good. During the fourth quarter, ICD had 87% utilization of the available fleet that being the fleet of 200 series rigs and not including the two 100 series rigs in the yard for conversion to 200 series capability. Our average fleet day rate was $23,700 a day. We implemented initiatives during the quarter to decrease our cash cost at the rig level by approximately $600 per day for a forward cash cost run rate of $10,800 per day at the operating rig level. This equates to an expected fully burdened cost run rate of approximately $12,500 per day also at the operating rig level. These are true costs at the rig level our forward GAAP cost may differ due to the inclusion of stacking cost and other allocations.

We ended the quarter with approximately $75 million in drilling backlog. Our 2016 utilization rate on that backlog alone is just under 50%. Our utilization rate in the first quarter of 2016 including rigs working in the spot market and on standby without crew remains at approximately the 87% of rate we achieved during the fourth quarter of 2015. During the fourth quarter, ICD set several new operational drilling and efficiency records for our clients. [Technical Difficulty] the number one well and a well with the lowest cost per foot ever achieved in the field, which included the running of three casing stripes. These record setting deliveries have become standard for ICD substantially improved our client’s economics and supported ICD utilization rates above industry averages.

The important takeaway from all this is the ability to field rigs and crews capable of material cycle time reductions will drive rig demand and Company performance not rig day rate per se. With drilling cost shrinking to 15% to 20% of total well cost and strip cost running around $75,000 per day, in an environment where cycle reduction time is the key differentiating parameter we don’t believe that there is any forward market clearing day rate with slow moving legacy mechanical NCR or non-pad capable rigs.

We continue this review and stream line operations and implemented additional reductions in staffing cuts and operational expenses during the quarter. During the fourth quarter of 2015, we produced forward operating cost by 1.5 million on a run rate basis, associated with staff reductions and efficiency initiatives in addition to the various efficiency initiatives discussed in last quarter's conference call, so in aggregate we enter 2016 with run rate cost reductions in excess of $3 million annually.

ICD rig manufacturing costs are extremely flexible and scalable on a real time basis. During the third and fourth quarters of 2015, we suspended our rig build program and de-staffed rig manufacturing, while maintaining our IP and capability to rappel the re-ramped rig build and ability to build at one of the lowest cost rig in the industry. As the modular manufacturer ICD has substantial flexibility to suspend or accelerate our rig build tempo and to ramp or reduce capital and operating spend in this regard rapidly and efficiently.

During the fourth quarter, we also completed the restaging of our supply chain deferring purchase of capital items that have been scheduled for 2015 into 2016, 2017 and 2018. In early 2016, we further deferred deliveries we had anticipated taking in the first half of the year. day rates and our fleet stacks, as with the case in prior quarter there is no formal market for rigs within our target market area. Rig utilization will not improve through day rate reductions, as I mentioned previously we don’t think there is any market clearing day rate for legacy rigs now or in the future. Contracts currently being discussed are associated with equipment that has a demonstrated ability to reduce cycle time. These contracts are highly bespoke and typically well to well.

Day rates under discussion for these bespoke arrangements are in the mid-teens. Note that I am referring here to peer rig day rate which does not include trucking, directional services, casing running or other services that are sometimes lumped into a revenue for rig calculation rather on discussing a two rig day rate. I want to note that we are discussions with new customers for new incremental deployment of available ShaleDrillers but to-date those discussions have not yielded contracts.

Currently we have two rigs stacked, two rigs on standby without crews with another expected to go on standby during the first quarter. One 100 series rig in yard and a second 100 series would be modified to 200 series specifications. We expect to complete that modification before the end of the first quarter of 2016. The rest of the fleet is working. We have a 2016 contractual backlog of 5.8 rig years, and even in the current environment we have only had one early termination and that was of a farm-out arrangement. Importantly, rather than releasing ShaleDriller rigs, our customers are generally choosing to place them on standby while evaluating options and market conditions.

In terms of liquidity, Phil will provide detail on our ABL on liquidity in his remarks. But I want to touch on where we see capital spend headed in 2016. We will of course fund maintenance capital spend, complete the conversion of the 100 series rig in the yard to full 200 series specifications and fund contractually required equipment purchases, all together about $10 million. And the other spend will be opportunistic, things such as the addition of a third mud pump, or upgrade to a 200 to a 7,500 Psi fluid system in order to win a contract.

In terms of forward market conditions, so with the upfront ammunition that I am looking to address directly let me first observe that today’s -- that given today’s commodity prices apart from drilling to hold a lease, proved reserves, fuel extensions or reservoir expansions. Current activity does not create current value, and predictably the market for contract drilling services remains weak where the expectation of further declines in the North America rig count during the first half of 2016. And however, I think the street and industry analysts have made a pretty good case for a gradual improvement in commodity prices through a combination of supply limiters, deferred or terminated capital spend accelerating decline curves and demand improvement driven by fiscal and monetary intervention with oil price gradually improving during the second half of 2016.

I think a good case is also being made that the current very large industry under and disinvestment is setting the stage for a powerful reversal in the global hydrocarbon supply demand relationship in a market of scarcity some years in the future. So given all that from a land contract drilling perspective, what factors will support utilization and day rate near-term and also provide a compelling and sustainable advantage in a recovery. As I discussed earlier, efficiencies and cycle time reduction are currently far more important than day rate and winning work. The hard economics of employing an omni-directional locking pad optimal ShaleDriller to cut 70 days in cycle time for a saving of $5.25 million versus AFE totally overwhelms the impact of a few thousand dollar per day savings by utilizing a legacy non-pad optimal rig with no ability to cut cycle time.

From a supply standpoint, sell side search reports have estimated there is only 150 or so 1,500 horsepower AEC truly pad optimal rigs are in the total North American land fleet, so as commodity prices ramp hopefully later this year we will come to the point of 80% or more of utilization of this asset class, well ahead of any other rig asset class which will intern support rig count and day rate. The management team at ICD remains sharply focused on our cost structure and liquidity base. We currently target free cash flow breakeven or better in 2016 that will require that our rigs working in the spot market continue to be employed. I want to thank all of our employees for their loyalty and commitment to ICD safety culture and our exemplary execution and performance for our customers. Our people as well as our equipment drive the ICD difference.

I’ll now hand the call over to Phil to discus fourth quarter financial results in detail.

Phil Choyce

Thank you, Byron and thanks everyone for joining us today. During the fourth quarter, we reported a net loss of $5.2 million or $0.22 per share. Included in this net loss were the following non-cash items. First, non-cash impairment charge of $3.6 million associated with one of our 100 series rigs which is in decommission pending its conversion to the 200 series pad optimal status when market conditions embrace. The impairment charge approximates the carrying value of the sub-structure and other equipment that will not be utilized by the rig when converted. Second, a onetime noncash charge of 400,000 associated with the write down of deferred financing costs due to the reduction of our aggregate commitment under our revolving credit facility during the quarter. And third, [indiscernible] associated with the disposition of assets largely attributable to our ongoing rig conversion as expected to be completed during the first quarter of 2016. Excluding these noncash items we reported a net loss of $945,000 or $0.04 per share.

During the fourth quarter, the fleet generated 962 revenue days, representing a 9% sequential increase from the third quarter. Reflecting full utilization of a new build rig that entered the fleet mid-third quarter as well as reactivation of a previously idle rig during the quarter. During the fourth quarter, our marketed rig which excludes our two 100 series rigs scheduled for conversion, achieved 87% utilization. On a sequential basis, we recognized revenue of $23.7 million compared to $21.3 million in the third quarter of 2015. None of our rigs earned revenue on a standby basis during the fourth quarter.

Total operating costs in the fourth quarter were $14.4 million included in our operating costs were approximately $462,000 or $0.02 per share net of tax associated with Galata yard’s rig building operations that previously had been capitalized. As discussed on last quarter's conference call, as construction activity becomes intermediate or safe all of our portion of these costs associated with the rig build will be expensed by not for accounting purposes. On a per day basis fully burdened operating costs which excludes these Galata yard expenses of $13,298 per day. Approximately $300 per day of these costs were associated with the reactivating one of our idle rigs during the quarter.

During the fourth quarter, SG&A expenses were $3.1 million, representing a sequential decrease in the third quarter which reflects various cost reduction initiatives as well as a reduction in cash based incentive compensation. Included in SG&A expense during the quarter was $1.1 million related to noncash stock-based compensation. Depreciation expense was $6.1 million during the quarter and fourth quarter tax expense was de minimis, both in line with our prior guidance. Interest expense after eliminating the 400,000 non-cash interest charge also came in line with our prior guidance. At December 31st, we had net debt of $57.4 million. And our borrowing base under our credit facility was approximately $99 million. During the quarter, cash outlays for capital expenditures were $7.9 million.

Now I want to turn to our outlook for 2016. As Byron mentioned given market conditions we have very limited visibility. Byron also mentioned that we have a few rigs that we expect to go on standby while market conditions remain depressed. Standby rates reduced our top line revenues but preserve our operating margins and expected cash flows. Also as Byron mentioned a customer under our format arrangement elected to early term that portion of the contract. This rig will continue earning standby revenues under the original contract.

Taking these items into account we expect that we will have between 940 and 955 revenue days during the first quarter of 2016 which we estimate 175 to 190 revenue days can be earned on a standby basis. We estimate our margin per day on these revenue days to range between $9,500 to $10,000 per day. As a fully burden margin per day beyond the other operating cost we expect to incur not within these guidance are pass through in nature as well as cost associated with our Galata yard. We expect the Galata yard expense to be consistent with the fourth quarter of 2015. The sequential decrease in margin per day relates to additional costs we expect to incur during the first quarter associated with onetime cost per rig being placed on standby and the one rig that became idle during the quarter.

Our reported operating cost will also depend upon when rigs actually go on standby rates during the quarter. But we currently estimate that our fully burdened OpEx per day during the quarter will range between $11,600 and $12,000 balance per day. In addition to these amounts we will recognize pass through costs and Galata yard costs as previously mentioned. Our reported top-line revenue number will depend upon when rigs actually go on standby rates during the quarter as well. But we currently estimate that our revenue per day during the quarter will range between $21,250 and $21,750 per day with the sequential decline being attributable to standby revenues and an increase in the number of revenue days earned as spot market day rates compared to the fourth quarter. We will recognize pass through revenues in addition to these amounts. We expect cash SG&A for the first quarter to approximate $2.5 million and non-cash stock based compensation to be approximately $1.2 million. This reflects a decrease in cash incentive compensation and an increase in non-cash stock based compensation on the so called run rate level.

Now I would like to discuss what we can say about 2016 as a whole given our limited visibility. Our aggregate backlog of work from contracts with original terms greater than six months was $74.4 million at yearend, of this amount approximately 53.3 million is realizable in 2016. And the weighted average number of rigs and backlog in 2016 is approximately 5.8 rigs or 48% of our currently marketed rig fleet of 12 ShaleDriller rigs. Looking at the backlog by quarter in 2016, we estimate that our average rigs and backlog by quarter as follows. First quarter 8.5 rigs, second quarter 6.2 rigs, third quarter 4.5 rigs, fourth quarter 3.7 rigs. We also have rigs operating in the spot market on short-term contracts and any revenues days earned in the spot market or on a short-term contract basis will be an addition to what we have in our backlogs. As mentioned some of this backlog will be earned on a standby basis which reduces the overall revenue number we actually realized compared to this reported backlog number.

On Galata yard cost looking past the first quarter and assuming no additional construction activity after completion of our rig conversion during the first quarter, we expect those costs to range between $700,000 and $800,000 per quarter through 2016. We expect the overall cash SG&A for 2016 to decline from prior levels and approximate $9.6 million and non-cash stock based compensation to increase from historical levels to approximately $4.9 million. Depreciation expense in 2016 should remain relatively constant from the fourth quarter levels. Tax expense should be limited in Texas margin tax. Yet we have fully reserved all NOLs for accounting purposes we do not forecast that we will recognize any tax benefits during 2016, even though we will be in a net loss position for burn purposes.

With respect to capital expenditures and liquidity, we expect the borrowing base on our revolving credit facility follow the rig appraisal when updated and adjust to this near downtime in market conditions. Assuming a 10% to 20% drop in appraisal values, our yearend borrowing base under our credit facility likely fall to the $80 million to $90 million range. We plan to reduce our capital expender budget to only things that are required to maintain our fleet and industry leading of comp, complete the rig conversion that is underway and opportunistic upgrade to our rigs. Operating under those parameters, we expect our capital expenditures during 2016 will approximate $10 million. We intend that for all equipment deliveries under our outstanding purchase orders until market conditions stabilize and upgrade.

And with that I’ll turn the call back over to Byron.

Byron Dunn

Thank you, Phil and thanks to everyone for joining us today. The fourth quarter was challenging due to the micro volatility, but the leadership team and employees at ICD have done a great job, managing the business for our shareholders. I would again like to thank all of our employees for their loyalty and commitment to safety and operational excellence. Our people and I our equipment make the IC difference -- hang on, I am a good performer on the second time hang on. Our people and our equipment make the ICD difference. We are all focused on keeping the ICD’s shareholder fleet working at the highest level of excellence, at the best rate possible and like you we are looking forward to a market recovery.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from James West with Evercore ISI. Please go ahead.

James West

Byron, so I know your 87% or so utilization, what about the rest of the pad optimal fleet out there today, what do you guys estimate as the utilization of the 150 plus or so pad optimal rigs that are in the market?

Byron Dunn

Well from what we can tell James listening to other folks’ conference calls, and talking to folk in the field. We think it tracks, so if you take a look at other people's equipment that has a similar characteristics, plus or minus some percentage, we think that’s -- we think all the things track.

James West

Okay, so presumably when we go into that upturn whether the second half or next year, you would be able to achieve pricing power fairly quickly given your utilization rate?

Byron Dunn

I certainly hope so.

James West

Right, okay then last for me is how you are thinking about new build rigs in this environment given that the pad optimal fleet is in the high 80% utilization range, we know those are the rigs of the future these are the ones we are going to be using and the ones that are demanded by customers I mean do you wait until the up cycle emerges, do you go ahead and build now I mean you guys are a growth company to build for growth and so without building the rigs you couldn’t just have not it a position of kind of being stagnant in a market that actually seems to be kind of you.

Byron Dunn

I think that's right but again the key for us will be term day rate I think we have mentioned that on previous calls so as the market tightens one of the attributes of that would be term for equipment insured supply and again once we see that emerge from the marketplace we will take a look at building again.

James West

And your term you usually want -- and I am assuming probably a year at least before you would start that rigs?

Byron Dunn

Yes.

Operator

Our next question comes from Connor Lynagh of Morgan Stanley. Please go ahead.

Connor Lynagh

I got disconnected during the prepared remarks so I apologize if you addressed this already, but I think last quarter you gave spot market commentary suggesting that rates rising the sort of the 16 to 17 range. Can you comment on where you are contract re-signings fell relative to that range?

Ed Jacob

Connor this is Ed. How are you this morning?

Connor Lynagh

Fine thanks how are you doing Ed?

Ed Jacob

Fine I think that what we have seen for what activity that has been in the spot market which has been limited, what we believe that is in that mid to high-teen range and we've been saying 15% to 17%, 15% to 18% and we've ceded in that spread.

Connor Lynagh

Is there something that made you increase the higher end of that range?

Ed Jacob

I think we will start seeing some -- we've seen some increased to go from to 17 to 18 as we see more desire by our customers to add 7,500 Psi mud systems in third pumps.

Connor Lynagh

Interesting, wondering [Multiple Speakers] sorry go ahead.

Ed Jacob

Little more color we’re in conversation with people for available ShaleDrillers as we mentioned in our prepared remarks, none of the conversations are really day rate centric, again if you look at our ability to reduce cycle time the cycle time savings just overwhelmed any minor $2,000, $3,000, $4,000 reduction in day rates and so as the focus really is on that rather than day rate.

Connor Lynagh

Can you give us some color on what some of your larger competitors are doing have you seen any sort of break in the ranks as far as relative pricing discipline on the higher stack rates?

Ed Jacob

Connor that for the first time in my long carrier I have seen contractors actually exhibit pricing discipline I mean I'm really proud of our organization of our industry from a contractor standpoint that the contractors, the competitors that we have that are playing in this high-end space have really done an excellent job of maintaining pricing discipline, haven’t seen anyone break from those ranks. And I'm happy that we’re doing that because I think it indicates that it indicates to the investment community that we do have some economic discipline and knowledge about what's driving this boat that is not day rate driven it's really about efficiency driven.

Operator

Our next question comes from Rob MacKenzie of Iberia Capital. Please go ahead.

Rob MacKenzie

Thanks. Byron a question for you Byron maybe as well, Byron do you worry at all of that waiting for small dealers to get locked in on term contracts might position it too late in the medium to the next sales cycle?

Byron Dunn

I mean we always think about that and so we have to balance where we think the market is headed with the six month delay in delivering a new build, and obviously that being stagnant is not part of our forward plan growth is important to us, so we think about it all the time and we want to make a good solid capital decisions. I think that as the market firms you are going to get term for particular asset classes and that is a commitment from our customers that they see the same thing we do so it is the constant balance and so that's a long answer to your question and the short answer is yes.

Rob MacKenzie

Okay, good. And I guess it is somewhat related follow-up would be is honestly you guys came out with a really good design with the ShaleDriller what's next are you looking on other innovations out there that can help you to extend and maintain your competitive position?

Byron Dunn

Well there is a -- let me take a scamper back and them let's get some color from Ed as well. If the things we are looking at right now are enhancements to rigs’ capability things like a third mud pump 7,500 Psi mud systems. If you stand back and look at the design as it stands as you all know we went through the E&P community when we started the company and asked them what they were looking for, and we came back with four operational characteristics to moving characteristics and those things have stood us in good skid so I don’t see step functioning changes in that -- those base requirements I do see an interest in higher capacity and higher pressure mud systems, Ed anything to add to that?

Ed Jacob

I think we're seeing and have been told by our customers both potential customers going forward and existing customers that the length of the laterals are getting longer, we use to use in 5,000-6,000 foot laterals were kind of the flavor of the day and it was a norm. Now we are looking at 10,000 -- 7,500, 10,000 foot laterals is being the norm, so that requires a lot more hydraulic horsepower and it requires a more consistent hydraulic horsepower to drill those laterals. However I think we are seeing also in several of our competitors have talked about it, and one major integrated oil service company has talked about it is the role data is going to be used and the data that is being acquired down hole and how is it going to be used to the extent and improve even additional efficiencies. And I think that is going to be close to the next step, but we are going to see laterals getting longer versus staying where they are.

Byron Dunn

And just amplifying on one of Ed’s points, the big data generation capability of AC computer controlled rigs is enormous and so this is on the horizon, but the use of that data in optimizing drilling programs, I think it is enormous and I think is underutilized right now and we have several conversations with folk who would like to be able to tap into that. And our computer controlled systems are tailor made for this so this is something I think you will hear about as we move forward. But it's not a driver of utilization today.

Operator

Our next question comes from Kurt Hallead of RBC. Please go ahead.

Kurt Hallead

We somehow has lost contact with your conference call at some point early on as well, so I am asking something that was already discussed I apologize too. So focus here on free cash flow and CapEx so you indicated $10 million of CapEx in 2016, most of that is going to be maintenance from what I can understand and then the comment about flat to may be slightly positive free cash flow. So what are the or what are any additional levers that can be pulled potentially maybe from a working capital standpoint to drive a little bit more free cash flow in 2016?

Byron Dunn

Kurt from a working capital standpoint, we are pretty efficient we have a very consistent fleet and that gauge us in looking at the capital intensity of our operations from a working capital spare parts perspective, payables, receivables and there is probably not a lot to do there. So it really comes down to maintenance CapEx expansion CapEx and in terms of getting the upgrades of the 100 series done, making some performance enhancements on the existing fleet as we have discussed. And then we have got a bucket which is open POs and we are in conversation with vendors who are our partners in this and we have moved those around and those are the -- I think it is probably the low hanging fruit if there is any and all I can say is that’s ongoing and I am very-very pleased with the way that our vendors have partnered with us and are working with us in this environment. So those are the things we will be looking at.

Kurt Hallead

Okay, and then with respect to your commentary about spot pricing, some of the other competitors that have indicated more on the mid-teens or sounds like similar equipment you guys are suggesting kind higher teens, what do you think we could chalk up the differentials to that commentary too?

Byron Dunn

I don’t know, I can’t answer that question I don’t have any data on what other people are talking about or what they are offering so, it will be pure speculation, Kurt I don’t know if that’s helpful.

Kurt Hallead

Okay I appreciate that. Now on the standby, can you explain a little bit about what's going on with standby and what does that mean and what are the E&P is telling you in terms of hi we are going to keep you on standby because we are going back to work in a month or two months, what's -- can you help us understand the standby dynamic a little bit?

Byron Dunn

Now the dynamic is they don’t want to lose the equipment because again I think that utilization is in great, but it's more robust in for other asset classes. And in these particular cases there is uncertainty about what they want to do next, where they want to do it, but they don’t want to lose their call on the equipment.

Kurt Hallead

Okay and then the standby rate compares to contract rate, what's the discount on that?

Byron Dunn

Well it will depend on the nature of the contract, these would be if it is a standby without crew rate the margin will be the same that we earn that’s the key. The contract rate could be on a vis-à-vis half the rate on a standby without crew, on a standby without crew basis. But the margin will be impacted we won’t have the operating cost while the rig is on standby.

Operator

Our next question comes from Daniel Burke of Johnson Rice. Please go ahead.

Daniel Burke

Byron, I think you have mentioned that achieving that free cash flow target we require rigs working stocks remain employed and that is a cumulative and certainly spot rigs are carrying lower margin than your term rigs, but can you address what that free cash flow threshold entails for you guys on the spot side, is it maintaining two rigs working at spot, similar of today or is it rolling off rolled term rigs to spot, I was just trying to better understand how you are thinking about contracts into year?

Byron Dunn

We’re not assuming that any of the rigs that aren’t working go back into the fleet until later in the year at best.

Daniel Burke

And then on the standby side Philip can you -- which -- what are the contract expiry dates on the standby can you share that with us?

Phil Choyce

On the standby rigs one goes into 2017, one late 2016 another one mid kind of early third quarter.

Daniel Burke

And then the last one from me I appreciate addressing the borrowing base. Could you remind us all that -- are all 14 rigs is included in the borrowing base presently?

Phil Choyce

No. There is 11 rigs in the borrowing base.

Daniel Burke

Okay. So you still have the option to slide incremental rigs if needed?

Phil Choyce

Yes. And you could think is that that can move around yes it can go up, yes it can go down it can go up but there is 11 right now.

Operator

Our next question comes from Brian Uhlmer of GMP securities. Please go ahead.

Brian Uhlmer

I have a quick question about stacking and reactivating rigs I think you stated that you spent about $300 per day per rig donating a rig in those off comps so that equates to just shy of $300,000 is that accurate number one. Number two was this more one off to that specific rig and to mobilization expenses such as that or is that a number we should look forward for some of these rigs that go on standby and then they are stacked and then you get brought back I'm curious to talk about kind of the process of rigs that go down and maybe brought back later on in the year?

Ed Jacob

Brain, this is Ed. I will address first part the technical requirements to stacking a rig and we do and when the rig is released the most important thing is for us to do a number of things that preserves the asset. And that is as our rig effect on what it's going to cost to bring the rig back out but the cost to bring a rig and reactivate a rig is essentially driven by the length of time that that particular rig has been stacked. And the case of 204 we had preserved it for a long period of time which mean you take all the rubber products -- there is a number of things that you have to do to preserve it removing fluids, putting preservers and liquid preserve fluids in and a number of things like that and that's what we are doing on everything and that's really what drove 204 a lot of that costs too and I will let Philip talk about the details of the cost a lot of that is labor that's required to bring the rig to crew to bring it back out back out prepare it and then put it back to work for the customers.

And we do that because we want to make sure that the rig performs when it goes back to work because I think a lot of what's going to be the focus of our customers going forward as all these rigs that have been stacked in the fleet regardless of the competitors and contractors as they go back to work a lot of this the intention by our customers is going to be how do they perform once they go back to work and I think it's essential that we take the proper steps both in planning to preserve it and then bringing it out so that we do go back and perform this is the rig have been working for a long period of time and I'll go back to Philip from the [Multiple Speakers].

Phil Choyce

Yes on the $300,000 and that is about right a half of it was really re-commissioning cost not purchasing of kind of those things I have alluded to half of it is really crew and us re-commissioning the rig before we send it out to the customer that is our drilling operations.

Brian Uhlmer

And then on the standby rigs without crew, I mean I would assume that the crews that you guys have it causes is why you are operating so well and be directors for training of that crew but do you furlough those guys or they keep insurance or do you have a partial salary or you try to keep where you are planning on that real quick or do you just pay them the severance and hope that you come back. How are you handling that especially on the standby rigs that they are able to get brought back to work pretty quickly?

Byron Dunn

Well I will address this in kind of a general way I mean this is still a very competitive business but it's important that you retain your intellectual property and your leadership that is really the key in my opinion, others may have different opinions. Some contractors have put a lot of emphasis on people I have some competitors that put very little emphasis on people. I believe the difference between contractors, we all have somewhat the same equipment but the differentiation between contractors are the people. And I believe that is essential that we maintain our leadership and our intellectual property and then have a process in place to train those people that we add as the rig count goes up. So we are going to keep all of our leadership personnel and our key employees. And then if the people that came in on the bottom that have the least amount of time with us those are the ones unfortunately will be laid off. But it is essentially that we keep our leadership in our intellectual property to basic, to have any chance of being successful going forward.

Brian Uhlmer

And does that account for the two drillers our system drillers or they are beyond that are you keeping maybe four to six extra hands per rig that can slide down just siting around but not doing revenue generating work, is that a accurate type count?

Byron Dunn

No we are moving them around throughout the fleet. What we do is the reason to stack without-crews, the reason on standby without-crews. We will use a minimum complement of people to maintain that equipment, but we will put them together where they are in a cluster and so you don’t need a full crew per rig or a number of people per rig, you can maintain several rigs with the same complement of people and we do that with both our filed personnel, our field technician and our supervisors and leadership that we have and our facility here in Huston that shares that responsibility Ed and Phil you want to talk?

Phil Choyce

Yes, we don’t really have people comment four or five people are extra on a rig and that’s not what we do. The key people are reassigned to different positions in the rig, so he’d sit where we are today we will have rig managers embedded in driller position, drillers embedded in they are further down so when it turns around we don’t -- those people we will reassign them to different responsibilities on the rigs, while and tell the rigs that the rig is on standby go back to work. So we don’t have extra people sitting around the rig side that we are paying.

Ed Jacob

Brian this is Ed again I’ll make one of those statement in it is just I can't help myself. But for being successful as a driller we have to be lean and mean and a junk yard dog. And so we don’t have extra people sitting around, we are going to make sure that our equipment is preserved, we going to make sure our leadership is preserved, we are going to make sure our intellectual property is preserved that there is no place in the business in this environment for excess cost to be sitting around.

Brian Uhlmer

Perfect thanks. That was a one long question and so I have a follow-up, hope it would be a little bit quicker. Manufacturing acutance of mine it was totally about how they are selling case and running tools and modern equipment et cetera two more drillers who want to do more case running on the road. And trends towards trying to do your own directional drilling, can you talk about kind of how you guys look at those service on your rig or crews if you do any of that work now and how you see that evolving to provide you guys with a more bigger piece of the pie on the same rig?

Ed Jacob

Well, we don’t do any of that work now. And we look at these things and it's had some but right now we don’t.

Brian Uhlmer

Okay, and so no immediate plans you said not a 2016 focus?

Ed Jacob

I wouldn’t say it's not a 2016 focus but I would say there is nothing that with any immediacy that that will -- we tend to do that type of thing.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Byron Dunn for any closing remarks.

Byron Dunn

Thank you all for joining us. We are sorry about the technical difficulties. We are looking into it and see what caused that. If you have any questions, missed any part of the prepared remarks please give Phil or I a call and we will be happy to go through with you in detail. Thank you for being on the call and we are looking forward to the market improving as we go through 2016.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.

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