Archer Limited (ARCH) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Archer Third Quarter 2026 Trading Update. [Operator Instructions] I will now hand the conference over to Dag Skindlo, CEO at Archer. Please go ahead.

Thank you, Derek. Good morning, and thank you for joining this third quarter trading update. I'm Dag Skindlo, CEO of Archer. And I'm joined today by CFO Espen Joranger. We will begin with the key financials and operational developments in the quarter, including backlog and recent contract awards. So let's move to Slide 2. As a reminder, today's discussion includes forward-looking statements and certain non-GAAP and/or IFRS measurements. These statements involve risks and uncertainties, and actual results may differ materially. Financial figures for 2026 are unaudited. Please refer to the presentation, our annual report and our public disclosure for further information. With that, let's move to Slide 3. Let me first briefly remind you of Archer's position and portfolio. Archer is a global energy service company with more than 50 years of operating experience. In 2025, we generated approximately $1.2 billion of revenue and $167 million of EBITDA. Our operations span Well Services, Land Drilling, Platform Operations and Renewable Services with approximately 3,800 employees across 40 locations globally. Our core exposure is to the production-related services within the brownfield part of the value chain, performing well intervention, drilling and P&A. These are areas where activity is supported by long-term customer requirements and where our combination of operational capabilities, technology and engineering expertise provides a strong foundation for continued growth. Let's turn to Slide 4 and the key financial highlights for the third quarter. Before I go into the quarterly EBITDA and backlog, let me first talk about the disappointing situation regarding higher debt level and pause in shareholder distribution, mainly driven by the Culzean wind project. Over time, the cost and delays in this project has grown substantially. Many changes in scope and deliverables have been initiated by the client, driving costs and causing delays from the initial time line. Certain of these variation orders have been challenged by the client and remain outstanding. In addition, major welding defects stemming from our fabricator in Greece delayed the project by more than 5 months and drove up the associated costs significantly, which we now seek to be compensated for. I think we have to be frank and say that we underestimated the complexity and the costs associated with this project, and we have been too optimistic about resolving related commercial issues. We cannot go into details on the amounts, the sequence of events and timing as we are in commercial positioning and negotiation with clients and subcontractor. However, I can assure you these processes have the highest priority in the organization. On a more positive note, Q3 was another strong quarter for Archer. Revenue was $268 million, while reported EBITDA was $44.2 million, corresponding to an EBITDA margin of 16.5%. EBITDA before exceptional items was $48.4 million with a margin of 18.1%. Adjusting for the divested workover business in Argentina, EBITDA increased by 8% year-on-year. The quarter includes an adverse EBITDA effect of approximately $3 million from the offshore industrial strike in Norway in July, constituting the majority of the exceptional items in the quarter. Backlog, including options, was $3.8 billion at the end of the quarter. This remains a very strong level and provide substantial earnings and cash flow visibility into '27 and beyond. The operational performance of the underlying business remained robust. At the same time, net interest-bearing debt increased during 2026, which brings us to Slide 5. Net interest-bearing debt ended the quarter at approximately $525 million. The increase during 2026 mainly reflects the delayed resolution of commercial matters related to the Culzean wind project and other planned investments to support recently awarded long-term contracts. The main project deliveries for Culzean have been completed. However, as mentioned, negotiation with the client concerning material variation orders together with a claim against a subcontractor have taken longer than anticipated and remain unresolved. The timing and amount of any recovery remain uncertain. As we largely have spent the cash flow already, any resolution to these matters would reduce our debt level. At the current leverage level, Archer is subject to restrictions on shareholder distribution under its financing arrangements. And due to the uncertainty regarding timing of recovery, Archer will temporarily pause its shareholder distribution program. This does not change our view of the underlying strength of the business. Our immediate priority is cash generation and deleveraging. The Board will revisit the shareholder distribution program early 2027 as leverage is expected to reduce and visibility regarding the outstanding commercial matters improves. Let's move to Slide 6. We continue to see strong commercial momentum across our core markets. Since Q1, we have increased our backlog by roughly $400 million on a net basis through a series of important contract awards and extensions. As mentioned in our Q2 release, the award in Q3 includes a 5-year contract for additional super-spec drilling rig for YPF and a larger integrated P&A project in the U.K., covering 7 platforms and more than 260 wells on a Apache operating rigs. After the end of Q3, we secured a further 3-year drilling contract with YPF with a 2-year option. The award supports the continued development of -- deployment of rig DLS-163 and adds rig DLS-160 to our operation in Vaca Muerta. The estimated contract value is $100 million to $110 million over the full 5-year period, including the option years. We also entered into a strategic technical and commercial partnership with AMRTUR in Brunei. The first project is to support AMRTUR's recently awarded 5-year wireline service contract with a major operator. This gives Archer an entry point into a new market and a platform for introduction of broader technology and well services offering, including solutions relevant to Brunei's material P&A market. Overall, these awards reinforce our growth position in integrated P&A, Vaca Muerta and International Well Services. Next slide, please. Our backlog, including options, was approximately $3.8 billion at the end of Q3 and is estimated to represent around $600 million of future EBITDA based on the expected revenue and margin profile of the contracted work. The backlog is well distributed across the portfolio. Platform Operations represent close to $1.8 billion, Well Services more than $1 billion and Land Drilling approximately $900 million. Integrated P&A contracts account for approximately $800 million across Platform Operations and Well Services. This demonstrates the strategic position we have built and gives us visibility across a growing market where customers increasingly seek broader integrated delivery models. For 2027, the backlog indicates that approximately 80% of expected revenues are already contracted. In addition, we expect further activity from framework agreements and other short-cycle opportunities that are not included in backlog, particularly within Well Services. The key takeaway is that we have strong multiyear earnings visibility and a solid platform for growth and deleveraging. Let's move to Slide 8. Land Drilling has turned into an important growth platform for Archer. Activity and oil production in Vaca Muerta continue to increase, supporting demand for efficient modern drilling capacity. Two super-spec rigs have recently commenced operation for YPF. A third super-spec rig, DLS-177 and the newly contracted DLS-160 are expected to commence operation by the first quarter of 2027. This is expected to increase the number of active drilling rigs from 7 at the beginning of 2026 to 12 during 2027. We now have close to $900 million of Land Drilling revenue backlog extending through 2030 and growing. The backlog is supported by long-standing relationships with YPF and Pan American Energy and provides strong visibility into future activity and cash generation. Operationally, the business continues to benefit from higher activity, solid utilization and efficient drilling performance. The additional rigs and long-term contracts further strengthens Archer's position in one of the world's most important unconventional basins. Next slide, please. Turning to the Culzean floating wind project. During Q3, Archer completed the main project deliveries. Final assembly and tow-out to the field have been completed and offshore commissioning is ongoing. The tow-out and commissioning is the responsibility of the client with Archer Wind in a support function with our reimbursement business model. Our focus is to complete the remaining commissioning activities safely and efficiently, while continuing to pursue an appropriate commercial solution to the outstanding matters. Following the experience on this project, Archer has decided not to pursue further offshore wind EPC projects and will pursue strategic options for Archer Wind, including partial or full divestments. Next slide, please. We reiterate our financial guidance for 2026. We continue to expect single-digit EBITDA growth for the full year despite the divestment of workover business in Southern Argentina. We expect the more favorable business mix to support an EBITDA margin improvement compared with 2025. EBITDA in the second half of 2026 expected to be 5% to 15% higher than in the first half, reflecting the timing of project starts and the continued ramp-up of contracted activity. Capital expenditure is expected closer to 7% of revenue in 2026, reflecting growth investment required for recently awarded contracts. Over the last 3 years, capital expenditure has been approximately 5% to 6% of revenue on a comparable IFRS basis, excluding the divested workover business. The underlying operation outlook remains strong. Combined with our backlog, this provides confidence in continued EBITDA growth in 2027 and support our objective of reducing leverage. With that, we'll open the line for Q&A. Operator, please open the line for questions.

[Operator Instructions] There are no questions at this time. I will now hand the conference over to Dag Skindlo for closing remarks.

Thank you all for joining us today. To summarize this call, we are suspending shareholder distribution following significant working capital building for the Culzean project. This is disappointing. I want to reiterate that this was a one-of-a-kind project, and we will not pursue such projects going forward. We will return to our service-oriented business model. However, a key takeaway is that Archer's core services delivering another strong quarter with solid operational execution, year-on-year EBITDA growth in the continuing business and a backlog of $3.8 billion. Recent awards in Vaca Muerta, the U.K. P&A market and Brunei further strengthens our long-term growth platforms. The increase in net debt requires a clear near-term focus on cash generation and deleveraging. We have therefore paused shareholder distribution in line with the restrictions under our financing agreements. We intend to revisit the program in early 2027 as leverage is reduced and visibility of the outstanding commercial matters improves. The underlying business remain robust. We reiterate our full year guidance and our backlog gives us confidence in continued EBITDA growth and deleveraging. With that, thank you for joining us today, and have a good day.

This concludes today's call. Thank you for attending. You may now disconnect.