Archer Limited (ARCH) Earnings Call Transcript & Summary

Welcome to the Archer Third Quarter 2020 Earnings Release. [Operator Instructions] Today, I'm pleased to present Dag Skindlo, CEO. Please go ahead with your meeting.

Thank you, Nat. Good morning, ladies and gentlemen, and thank you for joining us for Archer's Third Quarter 2020 Conference Call. The call is being hosted from Stavanger, and I am on the call together with our Chief Financial Officer, Espen Joranger. In today's call, I will touch upon the key highlights and summarize Archer's operation for third quarter and then hand the call over to Espen who will walk us through the financial section and go through the 2020 updated outlook. Towards the end of the call, we will open the line for questions. 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. Next slide, please. In the third quarter, we performed well both operationally and financially, limited by macro environment, governmental regulations and ongoing pandemic. Over the quarter, we saw a solid drop in our net interest-bearing debt, now below $500 million. This has dropped compared to second quarter of $20 million or even more meaningfully by $107 million year-over-year. Debt forgiveness related to our subordinated convertible loan, the release of working capital, lower interest costs, disciplined capital expenditures and cash flow from operations contributed to the reduction in our net interest-bearing debt. EBITDA before exceptional items came in at $22.3 million for the quarter. Over the last 2 months, we have secured additional backlog in our Platform Drilling division by 2 contract extensions from our customers in the U.K., securing work for 7 installations for 4 years and for 7 installations for 2 years. On the back of sound contracts, we are expecting to benefit from these extensions also in the related business areas within the Archer Group. As a precautionary measure, we have engaged in a constructive and fruitful dialogue with our bank group, resulting in a more flexible covenant path in 2021 and 2022. This dialogue was initiated by Archer due to the increased uncertainty of how the future may develop on the back of the ongoing pandemic. The robust buffer we now have secured enable us to focus on our operation, cash flow generation and suggest an adaptive environment in which we operate. At the turn of the quarter, we had a total of $138 million in cash and freely available and committed credit lines. We have communicated in the past that preserving our liquidity is one of our absolute priorities, and our success in achieving this leads us to comfortably prepay $20 million of our loan facility. The $20 million prepayment is merely an advance of the scheduled installments in the period for the first quarter 2021 to first quarter 2022. As such, we will, after the prepayment, have very limited fixed amortizations on our debt until the second quarter of 2022. This gives the comfort we need on our liquidity, the transparency we seek on our amortization schedule and, finally, reduction in our interest costs. Slide 4. Revenue in the quarter of $183.6 million was a decrease of $9.2 million or 4.8% relative to the second quarter. Quarter-on-quarter, we saw a decline in revenue in Eastern Hemisphere, partly offset by the increase in Western Hemisphere. The main explanation to the reduction in revenue is the discontinuation of our PD contracts on 3 assets in the North Sea. In Western Hemisphere, we saw smoothed signs of increased activity throughout the quarter, which we expect to continue further into the fourth quarter. EBITDA before exceptional items ended at $22.3 million or 12.2% of revenue. Compared to both third quarter 2019 and previous quarter, the reduction is $2.1 million. Both Western and Eastern Hemisphere show lower EBITDA contribution on a quarter-by-quarter basis. Later in the call, we will elaborate more on the performance in our divisions. With a total of $6.7 million in expected -- in exceptional items incurred in the quarter, reported EBITDA was $15.6 million. During the quarter, we recorded capital expenditures of $5.6 million. This is a modest decrease from the first 2 quarters in 2020 and substantially lower than the run rate in the second half of 2019. The CapEx in the quarter relates primarily to drilling activity, tool activation and mobilization of our land rigs as well as growth CapEx in [ modular rigs ]. Next slide, please. Moving to Slide 6. Platform Drilling and Engineering revenue decreased by $10.1 million relative to the same quarter last year and by $12.5 million compared to previous quarter. The reduction is primarily explained by a reduction in activity as 3 [indiscernible] facility platforms transferred out of Archer's contract portfolio as well as reduced reimbursement revenue of $7.5 million. Despite reduction in revenue, EBITDA for the segment increased by $1.8 million as the Modular Rig contributed to the operating results. The contribution from the Modular Rigs lifted the adjusted EBITDA margin to 12.3% compared to 9.7% in the previous quarter. Increased margin in the segment is due to reduction in low-margin reimbursable income, increased contribution from high-margin modular rig operations as well as a solid engineering project execution. EBITDA contribution from Platform Drilling, Modular Rig and Engineering remained solid and at a high level. After an initial delay of mobilization of Emerald in New Zealand, Emerald commenced operation in late September. Topaz is currently being demobilized on its operation on Heimdal. And we will start preparing the rig for the work schedule to commence next year for TAQA in the U.K. In the bottom graph, we see Archer's total rigs under contract and the number of rigs in active drilling mode. Following a positive trend in the first quarter of 2020, we experienced a reduction of 6 rigs going into maintenance mode in second quarter and an additional 2 rigs in the third quarter. At the beginning of the third quarter, 3 of the contracted platforms ceased to be operated by Archer, bringing the figure down to 40 in the quarter. We are optimistic that we will see an increase in activity in the fourth quarter as we expect 3 additional rigs to be in active drilling mode in all the part of fourth quarter, contributing the incremental revenue and EBITDA. Finally, our Engineering division continued to experience high activity both in the U.K. and Norway. Page 6, please. Our Platform Drilling operation is the backbone of our operation in the North Sea. And our presence and a total of 40 platforms provides business opportunities for our Engineering, Rental, Modular Rigs, Wireline and Oiltools business areas. It is thus important for us to maintain our market-leading position within Platform Drilling in order to monetize the synergies and additional work scope within Archer. We are therefore delighted that our clients have elected to continue their relationship with Archer by the award of the contract extension of 4 and 2 years for a total of 14 installations in the U.K. These contract extensions reflect our clients' confidence in our ability to maintain safe operations while delivering improvements to the Platform Drilling and well interventional operations on their assets. In the graph to the left, we illustrate Archer's track record of securing backlog through a combination of winning new platform drilling contracts and through retention of incumbent platform drilling contracts. When you look at the backlog for platform drilling contracts to the right, we note that there are a limited number of assets that is up for renewal in the short term. These long-term contracts are a total of 4 key assets, [ the foundation ] of a long range of supplemental service offering, including integrated service, P&A and slot recovery. Next slide, please. Well Services delivered a 4% increase in revenue compared to the third quarter in 2019, ending at $30.9 million. Compared to previous quarter, we saw a reduction of 1.9% in revenue. The adjusted EBITDA margin was roughly 12% of revenue and adjusted EBITDA ended at $3.8 million. Reduction in EBITDA and EBIT margin is a result of fall-through from lower revenue primarily from high-margin operation in Asia and Africa, combined with an unfavorable product mix in our Argentina operation and negative contribution from our wireline reporting segment. In the quarter, we had a successful ComTrac campaign in the North Sea, and the client was happy with our capability to run a large number of operations in few runs, saving the client time and money as well as contributing to their low carbon emission agenda. We will continue to commercialize the ComTrac and have currently deployed one unit of ComTrac in the Middle East. We had the first run with our mechanical casing packer, or MCAP, through Equinor. Our MCAP system improves the annular sea integrity and overcomes the shortcomings of cementing technology. MCAP technology is certified gas tight, or V0, and performs to the highest integrity standards. We believe the MCAP system will be another growth pillar in our Oiltools division. Next slide, please. Archer is committed to contribute to the ongoing energy transition. Short term, we can best contribute by ensuring efficient operations with a low -- with as low emission as possible. We continue to develop new technologies and services that reduce energy consumption and support our clients' low carbon agenda. Our One Archer approach is our branding of our initiative towards integrated service offering. With a broad portfolio of products and services within slot recovery and P&A, Archer can deliver best value to clients in this phase of their operations. We want to deliver more efficient operations by increasing the scope and smarter cooperation in Archer service lines as well as by closer relationship to complementary service providers. By doing this, we can reduce the cost for our clients and reduce the number of people onboard. The direct benefit for the client is cost saving while neither compromising service quality nor safety. The benefit for the society is represented by lower emissions through reduced footprints and use of resources. Archer will explore business opportunities within the green energy business. In order to benefit from such, we would need to identify synergies with our current operations as moving into new markets is based on competitive advantages and our competence. As mentioned in the previous slide, we conducted a successful campaign with one of our ComTrac units. The potential of application of ComTrac is substantial due to the ability to [ do large ] runs multiple operation in single runs, including doing deep and long wells. With traditional wireline, we are limited by the strength of the wire. The main problem with going deep alone is not when you go into the well but often the friction and weight when you pull out. By analyzing the latest ComTrac campaign we conducted, we estimate that we would have needed 31 runs with traditional wireline but managed with 9 runs using our ComTrac system. The estimated CO2 saving by using the ComTrac system was in excess of 800 tons. The cost saving of 66% for our clients was primarily driven by the short time period needed in order to conduct the campaign. We save the client about 17 days on the operation. The oil and gas industry in the North Sea must bring further efficiency, savings to the operations in order to bring down costs and minimize CO2 emission. The Archer P&A system, Stronghold Defender, has been verified that an annular barrier can replace a cement barrier for eternity. Archer has, along with our clients, worked to qualify a so-called creeping shale as an eternal barrier rather than using cement, which would be the traditional way for the barrier. The replacement of cement barrier with a natural barrier prevents hydrocarbons from flowing to the surface. Indirect emission savings from using creeping shale as a barrier rather than cement barrier is a 2 days rig time saving per barrier. For the feed in question with 7 wells, we estimated cost savings for this approach to be some $7 million, while the CO2 emissions was reduced by close to 100 tons. The CO2 emission reduction does not include the saving by not using cement. So the overall CO2 saving is higher if you take this into consideration. Next slide, please. Our revenue for Land Drilling was reduced by 49% compared to third quarter 2019. Compared to previous quarter, we see an increase of 14%. The increase came from low levels, but the trends support a more optimistic outlook going forward as more rigs have been sent back to work. We reported negative EBITDA from Land Drilling, mainly driven by the low activity and redundancy costs. We have reduced our headcount in Argentina with about 200 this year following the reduction in activity. At the end of the quarter, we had 304 employees in suspension, representing 18% of our workforce in Argentina. This compared to a total of 1,310 in suspension at the end of June, which represented 72% of our employees. Roughly 900 of our employees came back to operations during the quarter. As you can see from the bottom right graph, active units increased substantially compared to second quarter. The increase is both for drilling rigs, workover rigs and pull units. COVID-19 cases increased in Argentina throughout the third quarter, and we continue to monitor the situation closely to ensure the safety of our employees and customers. The number of quarantined personnel [indiscernible] and government-imposed regulation could impact activity going forward. Slide 10, please. In October, the President of Argentina, Alberto Fernandez, visited one of Archer's drilling rigs to announce a gas intensity plan to boost Argentinian gas production. The plan and [indiscernible] is to give subsidies totaling $5.1 billion to shale gas drillers to revive production in Vaca Muerta and attract as much as $5 billion in investment. The 4-year subsidy program is expected to cost Argentina $1.5 billion in 2021. The plan aims to stop the production decline and replace Argentina's natural gas imports by local production, boost investments, boost local employment and boost work for Argentinian service companies. The President, Alberto Fernandez, together with other authorities, took the time to visit and walk around Archer's drilling rig DLS-167, one of the drilling rigs equipped with the latest-generation technology that has drilled for YPF for more than 5 years now. The market environment in Argentina continues to be impacted by COVID-19, but we are currently expecting a recent positive activity trend to continue into fourth quarter. With that, I hand the word over to Espen who will take us through the financials in greater detail.

Thank you, Dag. Looking at Slide 11, we see that our total revenue for the first 9 months of 2020 amounted to $613.5 million compared to $688.9 million in the corresponding period last year. When netting off the reimbursable revenue, we see that operating revenue was reduced by $96.7 million from $626.5 million in 2019 to $529.8 million this year. The reduction is equivalent to 15.4%. On a quarterly basis, operational revenue of $160.2 million is a decrease of $43.3 million or 21% year-on-year. The reduction is due to a significant drop in activity levels, mainly related to weak shutdowns in Latin America following COVID-19, partly offset by the modular rigs back in operation and increased activity levels for Engineering and Oiltools compared to last year. On a year-to-date basis, EBITDA before exceptional items was $75.8 million, which was $0.6 million lower than a year ago. Exceptional items in the reporting period was $6.7 million and on a year-to-date basis totaled $19.4 million. Most of the exceptional items are incurred in our Argentine operation and is a result of COVID-19 pandemic. When adjusting for the exceptional items, the reported EBITDA ended at $56.4 million year-to-date or 9.2% of revenue. And for the quarter, reported EBITDA came out at $15.6 million. Compared to the corresponding quarter last year, reported EBITDA reduced by $7.8 million. EBIT ended at positive $2.8 million in the quarter. In our financial items, we include the results from associated entities, which amounted to $5.4 million in the quarter primarily related to writing down the carrying value of our investment in C6 Technologies. Changes in the carrying value of our investment in KLX will be recorded in other financial items as we will account for the changes in valuation through mark-to-market going forward. Interest expense of $7.4 million is reduced 28% compared to third quarter 2019. Net loss for the quarter was $12.3 million, and on a year-to-date basis, it was negative $10.3 million. Next slide, please. Turning to the balance sheet on Slide 12. Total current assets decreased by $16.6 million in the quarter, explained by a reduction in our receivables of roughly $20 million, offset by an increase in cash and other current assets. The reduction in accounts receivables is partly a result of reduction in activity and partly a reduction following our continued focus on collections. Total noncurrent assets were reduced by $12.9 million primarily as a result of the impairment of our carrying value of C6 and the mark-to-market of our investment in KLX as well as depreciation of our operating assets. This reduction was partly offset by an increase in our carrying value of goodwill following currency adjustments. On the liability side, the biggest difference is the reduction in our net interest-bearing debt following repayments under our revolving facility during the quarter of $15 million. Next slide, please. Archer continues to generate positive cash flows. This enable us to reduce our debt, evidenced by the continued reduction in net interest-bearing debt. At the turn of 2016, we had a NIBD of close to $800 million, which, at the end of third quarter 2020, was less than $500 million, a reduction by close to $300 million. The cash flow generation has been accompanied by diligent cash preservation in order to safeguard our liquidity, and our available liquidity was close to $140 million at the end of the quarter. We are comfortable that this is more than sufficient for our operations going forward. We have, as a precautionary measure, approached the lenders under our main loan facility to get some additional headroom to our covenants in the period ahead. The background for this is related to the increased market uncertainty we currently experience. Technically, we have reached an agreement to adjust our leverage ratio covenant for primarily 2021 and 2022. In exchange for the amendments, we proposed to prepay a total of $20 million of installments that are scheduled in 2021 and first quarter of 2022. When we look at the debt maturity profile, taking into consideration the $20 million prepayment in 2020, there is very limited scheduled amortization on our various loan facilities before maturity in 2023. Slide 14, please. To sum up the quarter and the key events, we secured substantial additional backlog to our platform drilling operations by securing contract extensions for a total of 14 installations in the U.K. The reduction in our net interest-bearing debt is important, and a continued reduction is a key element in making Archer a more robust and sustainable company. With the amendments to the covenants, we increase our headroom and improve our flexibility so that we can focus on our operation and to adapt to changes in the demand for our services. Given the macroeconomic environment, we continue to be cautious on our outlook statements. We do expect activity in fourth quarter to be higher than what we saw in third quarter, both in Eastern and Western Hemisphere. The key drivers in both Land Drilling and Platform Drilling will be the reactivation of drilling rigs. As we see it today, we expect revenue in 2020 to be around 10% to 15% lower than 2019. In relation to our second quarter report, we guided a 15% to 18% reduction, while in the first quarter, just after the outbreak, we guided on a 20% to 25% reduction in revenue. For the remainder of 2020, we expect to be cash flow neutral to moderately negative and ending 2020 with an estimated NIBD in the range between $500 million to $515 million at year-end. With that, I will hand the call over to the operator for any questions.

Thank you, Nat. Will you please open the line for questions?

[Operator Instructions] And as there are no questions, I will hand it back to the speakers for closing remarks.

Thank you. We appreciate everyone joining us for today's quarter's call, and we look forward to speaking to you next quarter. Thank you, and have a great day.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.