Archer Limited (ARCH) Earnings Call Transcript & Summary

Welcome to the Archer Fourth Quarter 2020 Earnings Release Call. [Operator Instructions] Today, I'm pleased to present Dag Skindlo, CEO; and Espen Joranger, CFO. Please begin your meeting.

Thank you, Richard. Good morning, ladies and gentlemen. Thank you for joining us for Archer's Fourth Quarter 2020 Conference Call. The call is being hosted jointly from Stavanger and Oslo. 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 operations for the fourth quarter and then hand over the call to Espen who will walk us through the financial section and the 2021 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. Revenue in the quarter of $210.6 million was an increase of $27 million or 15% relative to the third quarter as we saw an increase in revenue in Land Drilling and our Platform Drilling division. The main explanation for the increase in revenue is reactivation of rigs in Argentina, increased activity from Platform Drilling as well as additional revenue in the quarter from our modular rigs. On the back of increased activity and revenue, we are pleased to see that this is reflected in our reported EBITDA with an increase of nearly 23% or $3.5 million compared to third quarter. EBITDA before exceptional items ended at $23.3 million or 11.1% of revenue. This is an increase of $1 million from the third quarter. Despite quite large tax charges in the quarter, we reported a net positive income, which Espen will shed further light to later in the call. Over the year, we have seen a substantial drop in our net interest-bearing debt, now at $504 million. The drop from year-end 2019 amounts to $78 million. Next slide, please. Moving to Slide 4. Revenue from Platform Drilling, Engineering and our Modular Rigs increased by $18.4 billion from the third quarter and is at the same level as same quarter last year. Increased quarter-over-quarter of 16% is primarily explained by the increasing number of rigs in actual drilling mode as well as solid contribution from our modular rigs. On the back of increased activity, EBITDA in this segment increased by $2.2 million compared to the third quarter. After an initial delay of mobilization of Emerald in New Zealand, Emerald commenced operations in late September and had its first full quarter in operation. Topaz has been demobilized with operation of Heimdal and will start preparing the rig for the P&A contract with TAQA U.K. next year. Slide 5, please. Our Well Services division delivered revenue of $13.3 million, a modest reduction compared to the previous quarter. The EBITDA margin was 14.2% of revenue, and EBITDA ended at $4.3 million, which was an increase of $0.5 million compared to previous quarter. Both EBITDA margin and EBITDA increased compared to third quarter is explained by modest improvement in our Wireline division as activity is picking up. The new integrated wireline contract with Equinor will have financial impact on our financial results from the second quarter onward. On the product development side, we installed the first mechanical casing tractor, or MCAP, in the Middle East. Our MCAP system improves the annual steel integrity and overcomes the shortcoming of cementing technology. MCAP technology is certified gas type and performs to the highest integrity standards. Next slide, please. Moving to Slide 6. We wanted to give you some further input on the contract awarded by Equinor to our Wireline division. The total estimated contract value over 5 years is up NOK 2.4 billion or close to $300 million. The contract is incremental to Archer's current activity as we have very limited Wireline work scope . Archer is a contract counterpart of Equinor in this sector and services provided by our alliance partners, Welltec and Schlumberger, will be invoiced to Archer. Archer's direct portion of the contractual scope is estimated to between 35% and 40%. Archer will, under the contract, provide mechanical wireline services and logging, while Welltec will provide tractor services and Schlumberger will provide their superior logging and perforating services. The combined offering is unparalleled in the industry. A key benefit to Equinor is access to the best technology and a reduction in personnel onboard, arising from both the utilization of the combined wireline and platform drilling tools as well as ell as cross-training to run our alliance partners to the equipment. We look forward to working with our partners in Equinor to drive efficiency and improve production. Next slide, please. Our revenue for Land Drilling was reduced by 36% compared to fourth quarter of 2019. As compared to previous quarter, which had an increase of 25%. The increase came from low levels, with the trend supports a more optimistic outlook going forward as more rigs are being put back to work. As you can see from the bottom graph, active drilling units increased substantially compared to second and third quarter of 2020. The increase is both for drilling rigs, workover rigs and pulling units. In the south part of Argentina in Comodoro, we see activity levels stabilizing at a level somewhat below the pre COVID level of activity. We have less drilling rigs in operation and new revenue will be reduced by $40 million to $50 million compared to pre COVID. The lower level of activity and limited ability to transfer personnel internally within Argentina has forced us to continue our rightsizing of operations to reflect what we foresee as a new LTV level in the South. As we have highlighted before, it's a very costly and time-consuming process to lay off people in Argentina. The process requires a collaboration within Archer, strong unions, clients and government policies. In the north of Argentina, on the back of nationwide gas incentive plan, the activity has, to a large extent, rebounded, and we expect to be close to pre COVID activity levels late Q1 2021. Slide 8, please. Archer is committed to contribute to the ongoing energy transition. Our main contribution is to lower our own and client carbon footprints. Our biggest contribution is to reduce our clients' emission through efficient operations with a low emission as possible. We will continue to develop new technologies and services that reduces energy consumption and support our clients' low carbon agenda. Second important factor to understand is Archer's relative resilient position in the oil service market. About 90% of our global activity is in brownfield operations. Brownfield means that the field has been developed, infrastructure is in place and the field is already producing. At this stage, investments are typically smaller, there's less uncertainty in the investment decision. There is typically also a shorter period until you earn cash flow to repay your outlet. In an environment where there will be less demand for oil and gas long term, oil and gas companies are more likely to prioritize spending in brownfield development. Hence, the demand for Archer's brownfield services are more stable and more predictable than oil sales companies that are more exposed to the greenfield market. Furthermore, Archer has extensive experience and solution for covenant abandonment of wells. This is a significant market going forward. Researchers estimate that there are 2,500 wells that will be permanently abandoned in the next 10 years in the North Sea alone. Archer will have a significant business within the P&A market for decades to come. In order to have a sustainable business, you must, in addition to deliver low carbon solutions in the long-term market segment, deliver for and improve the capital structure. Archer has, over many years now, demonstrated that we have delivered consistent financial results under challenging market conditions and improve the capital structure. We are exploring green energy as new business area, but have not concluded on the way forward yet. But there is no doubt that we will explore and develop when we find an opportunity to deploy our competence in an attractive market segment. With that, I will hand the word over to Espen, who will take us through the financials in greater detail.

Thank you, Dag. Looking at Slide 9, we see that our total revenue for 2020 amounted to $824 million compared to $928.6 million last year. When netting off the reimbursable revenue, we see that operating revenue was reduced by $118.5 million in 2020, ending up $715.1 million for the full year 2020. The reduction is equivalent to 14.2%, explained by the impact of COVID across our divisions. On a quarterly basis, operational revenue of $185.3 million is a decrease of $21.8 million or 10.5% year-on-year. The reduction is due to a drop in activity levels, mainly related to rig shutdowns in Latin America following COVID-19, partly offset by the modular rigs back in operation and increased activity levels for engineering compared to last year. For 2020, EBITDA before exceptional items was $99.1 million, which was $4.8 million lower than in 2019. Exceptional items in the reporting period was $4.2 million, and on a year-to-date basis, totaled $23.6 million. Most of the exceptional items are incurred in our Argentine operations and is a result of the COVID-19 pandemic. When adjusting for exceptional items, EBITDA reported for 2020 ended at $75.5 million or 9.2% of revenue. For the fourth quarter, reported EBITDA came out at $19.2 million compared to the corresponding quarter last year, reported EBITDA reduced by $3.3 million. EBIT ended at positive $7.6 million in the quarter and with net financial items amounting to positive $7.3 million, our net income before tax amounted to $15 million. The net financial items were positively impacted by foreign exchange effects on an intercompany loan agreement, which does not have any cash impact in addition to our market-to-market value adjustment for our shareholding in KLX Energy in the quarter. Net interest expense of $7 million represents a reduction of 28% compared to our fourth quarter 2019. The tax expense of $12.2 million is explained by, amongst others, an expense of deferred tax assets in Argentina, resulting in a net positive income of $2.7 million for the quarter. Slide 10, please. Total current assets increased by $7.9 million in the quarter explained by an increase in our receivables of roughly $14 million, offset by a reduction in other current assets. Total noncurrent assets increased by $7.2 million, primarily as a result of the currency adjustment to our recorded goodwill, which was partly offset by a reduction in our deferred tax assets, as mentioned in the previous slide. On the liability side, the biggest difference is the reduction in the current portion of our net interest-bearing debt following the amendments carried through in fourth quarter on our revolving loan facility and the corresponding increase in long-term portion of interest-bearing debt. The increase in equity of $14.1 million is a result of the positive net income for the quarter, combined with currency adjustments of our goodwill, which does not impact the P&L. Next slide, please. When we look at the debt maturity profile, we have very limited scheduled amortization on our various loan facilities before maturity in 2023 of our main facility. When the pandemic hit the world, one of our primary focuses was to preserve our liquidity in order to enable Archer to withstand the crisis; however, that evolved. For us, the pandemic has not had a large impact as we feared in the mid of March 2020. But looking back at 2020, a year which forever will be regarded as one of the most [ devastating ] years in the economy, Archer has generated cash, reduced our credit lines, repaid debt prior to the scheduled amortization, extended the final maturity of our main debt facilities, negotiated debt forgiveness, adjusted our financial covenants and increased our financial flexibility, while we overall achieved our target of preserving our liquidity position. Following the various amendments to the loan agreements conducted in fourth quarter, including committed reduction of $20 million on the RCF and installment of EUR 3.5 million on our Topaz facility, we continue to have in excess of $110 million in available liquidity. Slide 12, please. To sum up, fourth quarter was a solid operational quarter with improved financial metrics and increased EBITDA, both before and after adjustments for exceptional items. We delivered positive net income as well as positive free cash flow. Furthermore, during the quarter, we laid the foundation for further Wireline work following the award of the integrated wireline contract from Equinor. Looking forward and given the macroeconomic environment, we continue to be cautious on our outlook statements. Market analysts expect overall market expenditures in 2021 to be in line with 2020. while we expect improved financial performance in 2021 and on the back of a strong backlog and market position. As we see it today, we expect revenue in 2021 to be moderately higher on our second half 2020 run rate. We are preparing for a general increase in activity, leading to an increase in EBITDA reported in 2021 of 10% to 20% compared to full year 2020. We will continue our investment discipline and estimate CapEx of 3% to 4% of revenues. And finally, the expected positive free cash flow will reduce our NIBD year-over-year. We are further exploring accretive M&A opportunities, which can segment our position within the brownfield operations and the well P&A market. With that, I will hand the call over to the operator for any questions.

Thank you, Richard. Will you please open the line for questions.

[Operator Instructions] There appear to be no audio questions at this time. Would you like to say any closing remarks or would give another reminder?

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