Archer Limited (ARCH) Earnings Call Transcript & Summary

Welcome to the Archer Fourth Quarter 2019 Earnings Release, Outlook 2020 and Refinancing Update. [Operator Instructions] Today, I'm pleased to present Executive Chairman, Kjell-Erik Østdahl. Please go ahead with your meeting.

Thank you, Nats, and good morning, ladies and gentlemen, and thank you for joining us for Archer's Fourth Quarter 2019 Earnings Conference Call. This call will be different than normal as we are giving a short update to the market on the progress of our refinancing discussions, along with preliminary 2020 financial outlook in addition to the normal earnings call. Moving to Slide 2. I would like to note that the information provided in today's call includes forward-looking statements as well as non-GAAP financial measures. I will touch upon the key highlights before Dag will summarize Archer's refinancing progress and Q4 earnings. I will then provide an outlook for 2020. Before ending the call, I will open the line for questions. Next slide, please. Refinancing talks have progressed well, and we are currently in the final stages of the process to conclude an amend-and-extend solution with our senior lenders. We expect to announce a final solution within the first quarter of 2020. We continue to deliver strong margins. EBITDA before exceptional items ended at $27.5 million for Q4 or 11.5%. Furthermore, we had a strong cash flow generation in the quarter, partly due to unwinding of working capital and partly through strong operational cash flow. Net interest-bearing debt reduced by $25 million and ended at $582 million. We had a strong order intake in the quarter. This includes the $200 million contract with YPF in Argentina and an extension of our Peregrino contract with Equinor in Brazil. I will now hand over the word to Dag for more details.

Thank you. Moving to Slide 5. We can see that our net interest-bearing debt as a function of EBITDA has decreased significantly since 2016 and now stands at 6.2. We have been able to reduce NIBD to EBITDA from 16.2 in a challenging market environment. Following definition in our loan agreement, the new ratio now stands at 5.15. Furthermore, we have maintained a very strong liquidity reserve of around $140 million since 2017, and our net interest-bearing debt is down 27% relative to 2016. We forecast further reduction in 2020 and the years to come. Based on the above-mentioned factors, we have had good constructive discussions with our banks, and we are currently in the closing stages of concluding a solution with our senior lenders. Our goal has been to extend the maturity of our loans based on our strong financial performance. We are confident that we will achieve this within the first quarter of 2020. Once all term sheets have been signed, we will update the market on the details of the amendments. Next slide, please. Archer has remained remarkably resilient in our ability to pay interest expenses and reduce debt despite changing levels of earnings. This has been achieved through balancing our working capital and capital expenditures. As we are now into a growth phase, more capital is used to grow the business and secure future earnings. In the event of the market turns, we have demonstrated our ability to reduce working capital and constrain CapEx, securing our ability to successfully serve our debt. Resilience in cash flow generation has served as the foundation for our debt amend-and-extend discussions with senior lenders. Next slide. Moving to the quarterly financials on Slide 8 and Q4 financials. Operating revenue in the quarter amounted to $239.7 million, an increase of $6.5 million relative to the corresponding quarter last year. EBITDA pre exceptional items ended at $27.5 million or 11.5% of revenue, margins not seen since Q1 2015. We reported a positive EBIT of $8.3 million versus $10.7 million in the same period last year. The reduction in EBIT was due to about $5 million of redundancy costs and impairments of 2 rigs in Argentina. As forecasted in our previous quarterly call, the increase in working capital in Q3 was reversed in the last quarter of the year, contributing to a $25 million reduction in the net interest-bearing debt. For the full year, we reduced the NIBD slightly, despite exceptionally high investment in growth CapEx in 2020. Next slide, please. On Slide 9, we see Archer's development in key financial metrics over the last 5 quarters. Note the stable revenue and EBITDA over the last 5 quarters. As mentioned, EBITDA before exceptional items ended at $27.5 million or 11.5%, marginally higher than Q4 2018. CapEx spend increased by $6.5 million relative to the last quarter of 2018 and up $3.9 million relative to previous quarter. The increase in CapEx is related to upgrade of rigs in Argentina of $9.1 million, Archer Emerald reactivation of $6.8 million and growth in Oiltools, $2 million for new tools. CapEx in the first quarter of 2020 is expected to drop meaningfully. Net interest-bearing debt, as reported on the previous slide, ended at $582 million, down $4 million since a year ago, despite spending $48 million -- $41 million of investments. Putting full year 2019 financials into perspective, we can see an impressive development both in top and bottom line since 2017. Relative to last year, EBITDA increased 30%, and EBIT has increased with over 170%. In terms of absolute numbers, the EBIT for 2019 is the largest reported since 2010. This growth can be attributed to a strong focus on profit improvements during the last couple of years, in addition to slightly higher market activity in the offshore E&P sector. We expect the margin development to continue positively into 2020, as we also now have both our modular rigs back on contracts. Moving to Slide 11. Platform Drilling & Engineering revenue increased by close to $8 million relative to the third quarter and increased $13 million relative to the same quarter in 2018, ending at $133.4 million. This represents an increase of 11% of revenue. EBITDA increased by $1.8 million relative to Q4 2018 or 18%. The increase is partly due to better performance from Engineering, which we expect to grow further in 2020. CapEx spend increased in the quarter and is mainly related to getting the modular rig, Emerald, ready for operation in New Zealand with offshore mobilization in March 2020. The rig is currently in the Atlantic Ocean on a boat heading for New Zealand. During the quarter, we received an LOI for a multiyear operation for Archer Topaz in the U.K. A successful award of this contract will secure this rig working until 2023/2024. Furthermore, Platform Drilling was awarded a 4-year contract extension from Equinor for the Peregrino field offshore. This is currently the only fixed platform operation we have outside of the North Sea, but shows that a successful deliverable can be achieved internationally. As you know, we have both modular rigs contract in 2020. The backlog at the end of 2019 is 6% higher than in December 2018, standing at $2.3 million. This includes the value of future options for Platform Drilling. Finally, our Engineering division has shown steady increase in both revenue and margin through the year. Next slide, please. Our core Platform Drilling services is a strong cash flow-generating business with limited CapEx. Contracts are typically 3 to 5 years long with options for extensions. We expect higher activity in 2020 relative to 2019. The firm backlog is close to $900 million, which excludes rental income with high margins. Next slide, please. Well Services delivered a strong 10% increase in revenue compared to the fourth quarter 2018, ending at $33.6 million. EBITDA ended at 16.2% of revenue. Given the increase in demand for our Oiltools, we spent $2 million in the quarter, further supporting the growth in demand. We expect to continue spending CapEx towards value-building growth in 2020. Oiltools continued to break run records, achieved yet another record quarter in number of runs in the fourth quarter. We have now had our first rigs deployed in Brazil, a market that we have never previously worked. We have also worked diligently to get access to the large Oiltools market in Saudi Arabia. We have a few products under qualification and recently signed an agreement with a partner, which will allow us to sell products and services. Our expanded product offering and focus on the larger Middle East market will allow us to continue to grow in the years to come. Wireline had a somewhat disappointing 2018 -- 2019 as client activity in the North Sea was volatile and slowed down. As a result, we have reduced our workforce with 15 full-time employees during the quarter through natural attrition. We expect to see positive returns from this reduction in 2020. Furthermore, we are working to establish partnerships with other service companies to expand our global reach for our proprietary logging services. Moving to Slide 14. Revenue for Land Drilling was stable relative to Q3 but down 12% relative to Q4 2018. As you can see from the bottom left graph, active drilling rigs dropped by 5 during the year, leading to lower revenue. The lower activity has necessitated another round of headcount reductions with approximately 110 full-time employees leaving the company in Q4. For the full year, we have reduced head count by 210 people within Land Drilling. As such, we booked a restructuring charge of $4.8 million in Argentina in the fourth quarter, with reported EBITDA ending at $8.3 million. CapEx ended at $9.1 million as part of our commitment to upgrade the 3 rigs for the new $200 million contract for YPF in Vaca Muerta. The CapEx will reduce meaningfully after our corporate CapEx has been spent and 2 of the 3 rigs are now back operating in the field. These rig upgrades will secure Archer's position as the leader in drilling services for the unconventional market in Argentina, and we look forward to continuing to provide safe and efficient operation to YPF for many years to come. We also operated 1 rig on behalf of Pan American Energy in the north of Argentina, the Pan American 001. During the quarter, we reached an agreement to upgrade this rig and to extend the operating and maintenance of the rig for 3 more years. The cost of upgrade will not be paid by Archer. Going into 2020, we are prepared for lower activity level in the north of Argentina as uncertainty on the new government plans still prevail. Next slide, please. The $6.5 million increase in revenue in the fourth quarter is largely due to more reimbursable revenue. The operational revenue is slightly down relative to Q4 2018. EBITDA before exceptional items of $5 million was $27.5 million or $0.6 million higher than a year ago. Reported EBITDA ended at $22.5 million or 9.4% of revenue. EBIT ended at $8.3 million, representing a margin of 3.5%. For the full year 2019, this was $42.5 million, the highest it has been since 2010. Net financial items came in at $7.4 million, while interest expenses of $9.8 million was offset by a noncash gain of $1.6 million on currency gains on internal loans. Net income for the quarter was $3.9 million on the back of tax benefit recorded in Argentina. Turning to the balance sheet on Slide 16. Total current assets increased by $31.3 million in the quarter, mainly coming from an increase in cash balance of $24.7 million. Accounts receivable decreased by $3.2 million as a result of strong collections in the fourth quarter. Our main loan facility is, as of Q4, classified as a current liability. This will be reclassified as soon as we have execution on new loan agreements. NIBD reduced significantly in the fourth quarter as a result of good collection, with NIBD ending at $582.3 million. The total reduction in NIBD of $24.7 million translates to a reduction of 7 days in receivable outstanding compared to the previous quarter. I will now hand over to Kjell-Erik for the outlook on Slide 17.

Thank you, Dag. 2019 was another year of growth for Archer. This growth is set to continue in 2020. The lower activity in Argentina is offset by an increase in revenue and margins from the Eastern Hemisphere with our modular rigs coming back into operation and continued growth in Well Services. EBITDA in absolute figures is expected to grow with an anticipated margin of 10% to 12% for the full year. We continue to guide CapEx of 3% to 4% of revenue. 2019 CapEx was slightly higher than the previously guided numbers, but we are glad to spend more, as this means that our assets have good growth opportunities. As LIBOR rates have tumbled and the forward rates are low, we expect to see lower interest expenses in 2020 relative to 2019, which, again, will help us further reduce our debt and improve our credit metrics. All these actions should result in a step-wise reduction in net interest-bearing debt, and we remain committed to have a laser-sharp focus on profit improvement. Furthermore, Archer is always looking to optimize our portfolio of business and is open for new business models and partnerships globally. Specifically, I want to highlight that Archer is uniquely positioned to deliver integrated services in the North Sea for late-life assets, including offering a large suite of services to permanently plug and abandon wells. This is going to be a significant market going forward. Summing up on Slide 18. Margin growth was strong in 2019 with an increase in EBIT of more than 170% relative to 2018. On the back of getting our modular rigs back in action in 2020, we will continue to improve our credit metrics. Finally, we expect to close refinancing in the first quarter of the year with extension of maturities. With that, I will hand the call over to the operator for any questions. Thank you, Nats. Will you please open the line for questions?

[Operator Instructions] We have one question from the line of Terje Fatnes from SEB.

It's Terje. I have a question on the refinancing. Can you give some flavor of what kind of structure you are aiming for? Will it be a pure extension of what you already have? Will it require that you pay down additional? Or will you have to raise equity as part of that refinancing?

I didn't tie that -- sorry. Go ahead, Kjell-Erik.

No. I actually said we are very close to finalizing it, and we'd rather wait with all the details until we have agreements from all parties. We expect that to happen within the first quarter of 2020.