Archer Limited (ARCH) Earnings Call Transcript & Summary

Welcome to the Archer Third Quarter 2021 Earnings Release Call. [Operator Instructions] Today, I am pleased to present Dag Skindlo, CEO; and Espen Joranger, CFO. Please begin your meeting.

Thank you, Mark. Good morning, ladies and gentlemen, and thank you for joining this conference call for third quarter 2021. Archer's Chief Financial Officer, Espen Joranger, is joining me on the call today. In today's call, I will touch upon the key highlights and summarize Archer's operation for the third quarter. Espen will thereafter walk us through the financial section. 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. The revenue for the quarter of $242.8 million is an increase of $14.8 million relative to the second quarter, corresponding to an increase of 6.5%. Compared to Q3 2020, revenue increased by $59.2 million or 32.3%. The increase in revenue is due to additional contribution from Well Services and Land Drilling, partly offset by a reduction in Platform Drilling. On the back of increased activity and revenue, our adjusted EBITDA increased $1.2 million from second quarter. The increase was driven by increased contribution from Well Services and Platform Drilling. During the quarter, we incurred $3 million of exceptional charges, mainly related to COVID-19 and the idle personnel in Argentina, resulting in a reported EBITDA of $20.5 million. Compared to the end of second quarter 2021, we see a modest reduction in our net interest-bearing debt, ending at $517.5 million. But adjusting for the impact of the DeepWell acquisition, we report a net interest-bearing debt in line with our expectations. Lastly, we successfully completed a multiyear plug and abandonment campaign on Gyda, which I will cover in greater detail later in the presentation. Slide 4, please. Our Well Services division delivered another quarter with record revenue of $61.6 million, a solid $31.9 million increase compared to previous quarter. The increase is largely driven by a full quarter contribution from the new Equinor contract as well as revenue from the DeepWell acquisition. On the back of increased revenue, we are pleased to report an additional $1.2 million of EBITDA from this segment compared to the second quarter. On the operations side, we highlight a very successful ComTrac campaign on Visund. In addition to a sound EBITDA contribution, we estimate that the operator reduced the carbon footprint by close to 1,000 tons of CO2 by using our ComTrac system compared to what would be the case with traditional wireline. Slide 5, please. Archer's Oiltools division started off with the development of first of a kind V0-certified gas-tight plug for the North Sea market in the early 2000. The plug was developed for the highest quality and safety standard, typically for the Norwegian continental shelf. Over time, the product offering has been expanded to fill the requirements from our clients. From being a provider of primarily plug and plug solutions, Oiltools has expanded the offering to include cementing solutions, well cleaning solutions and lately, slot recovery and P&A solutions. This has been possible due to the extraordinary contribution from our employees and our commitment to invest in such developments. Currently, we have a dedicated team of 12 engineers working on our vision to provide value-adding technology to the highest standards within the well integrity and well intervention market. From being a provider of V0 plugs in the North Sea, we have grown to be an international player with presence and reach in more than 40 countries, including the major oil hubs like Houston, Abu Dhabi and Perth, as well as frontier oil and gas development areas such as Mozambique and Guyana. International expansion has been capitalized by the wish from the oil majors to use our tools in their global operation. Our customer base are all the oil majors, including Exxon, Shell, BP, Chevron and Equinor. Archer Oiltools continue to be recognized as an industry leader for smart and robust solutions for markets where well integrity, reliability and time savings are of utmost importance, and we are committed to further grow this business segment in the time ahead of us. Our product and geographical expansion has allowed Oiltools to deliver close to 20% annual growth from 2017. Moving to Slide 6. Revenue from Platform Drilling, Engineering and our Modular Rigs are fairly stable relative to previous quarter. The reduction in activity is a result of 3 rigs not being in our contract portfolio for the quarter. Despite the lower overall revenue, we are pleased with $1.1 million additional EBITDA contribution. The increase in EBITDA is a result of bonuses achieved by our modular rig during the quarter following operational excellence resulting in an overall EBITDA margin close to 10%. The number of rigs under contract in active drilling mode was stable compared to second quarter as we saw some higher activity in the U.K. offsetting some reduction in Norway as Gyda is coming off active mode during Q3. Moving to Slide 7. I wanted to briefly touch upon the P&A campaign concluded on Gyda. Archer has been present on Gyda  since 1992. And as that production at Gyda is coming to an end, we were awarded a contract for plug and abandonment of the 32 wells back in 2017. The contract scope included plugging and abandonment of all the wells of the Gyda  platform operated by Repsol. The plug and abandonment were the first well commenced in 2019. After 18 wells being plugged by March 2020, there was 8 months COVID-19-related break before the operation recommenced in October 2020. A total of 190,000 meters of casing and tubing were pulled during the operation, while the tripped drill pipe exceeded 1 million meters. A multitude of proprietary Oiltools and Wireline services were used in the operations. Archer has developed an operating model, which we call One Archer. Key features of the One Archer operating model includes cross-training of personnel, cross-selling of services from other Archer segments, partnering up with external complementary service providers as well as in-sourcing greater control of the overall project at hand. Gyda P&A campaign was the largest One Archer project to date and included services from Platform Drilling, Wireline, Engineering and Oiltools. The success of the Gyda campaign was strategically important for Archer to build a One Archer track record and show that we can take on plug and abandonment projects of this size and significance. We continue to regard P&A work ahead of us as strategically important for Archer in the years to come. Slide 8, please. Our revenue for Land Drilling increased by $5.2 million compared to previous quarter, while adjusted EBITDA contribution was $0.7 million lower. We incurred a total of $2 million of exceptional charges in the quarter, resulting in a disappointing EBITDA of $1.6 million. The exceptional charges were related to severance payments, cost for idle personnel and COVID-19-related sick leaves. The results in Argentina remained below expectations as the country continues to battle COVID-19 and financial distress. As you can see from the bottom right graph, active drilling units in third quarter was stable compared to previous quarter. We are dependent on increased activity within Land Drilling in order for us to deliver meaningful EBITDA contribution from this segment. As the COVID-19 pandemic prevails, combined with the financial distress in the country, we are muted on our expectations for a rebound in activity short to medium term. 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 9, we see that our total revenue for the third quarter amounted to $242.8 million compared to $183.6 million last year, an increase of $59.2 million. When netting off the reimbursable revenue, we see that the operating revenue increased by $45.2 million or 28% compared to third quarter 2020. The activity in third quarter 2020 was, of course, severely impacted by the pandemic. For the quarter, EBITDA was $20.5 million, $4.9 million higher than third quarter 2020. The increase is primarily driven by improvements in our Well Services segment and Land Drilling division. Exceptional charges for the quarter amounts to $3 million as incurred costs related to the impact from COVID-19 and idle personnel in Argentina. EBIT for the quarter came out at $7.4 million. In our other financial items, we adjusted our carrying value of our shares in KLX Energy by $4.4 million following the drop in share price over the quarter. In addition, we have noncash foreign exchange impact on our intercompany financing arrangements following the weakening of NOK against USD and noncash foreign exchange related to continued depreciation of the Argentine pesos over the quarter. Net income before tax for the quarter is negative $7.5 million, whereas net income after tax is negative $9.7 million. Slide 10, please. Total assets reduced by $24.5 million in the quarter, mainly explained by the foreign exchange adjustment of goodwill assets and other receivables and reduction in restricted cash. Accounts receivable only increased by $1.4 million despite a 7% increase in revenue in the quarter. On the liability side, the biggest difference is the reduction in accounts payable of $6.9 million since the last quarter. Net interest-bearing debt came out at $517.5 million, which is a modest decrease compared to second quarter. The reduction in equity is a result of the negative net income for the quarter as well as foreign exchange effects on goodwill. And the book value of our equity is $102.9 million at the end of September, while we continue to preserve our liquidity and have in excess of $100 million in available liquidity, which includes undrawn and committed credit lines. Slide 11, please. To sum up, our third quarter was another solid operational quarter with improved financial metrics and increased adjusted EBITDA despite challenging situation in Argentina. Eastern Hemisphere performance continued to be strong, while the outlook in Argentina remain muted due to uncertainty. Compared to third quarter 2020, we saw an increase in revenue of 32%. Our Well Services division stands out as the segment that shows both the best performance as well as improvement, particularly due to the growth within Wireline. We report a negative net income in the quarter, which is negatively impacted by the market value adjustment of our shares in KLX Energy and foreign exchange effect on intercompany financing agreement, which does not have a cash impact. We also incurred $3 million in exceptional charges in the quarter. We reiterate that we see limited signs of improvements in our operation in the south of Argentina. As we see it today, we now expect revenue to be 10% to 15% higher than our 2020 revenue, and we expect EBITDA for 2021 to be roughly 10% higher than last year. We will continue our investment discipline and estimate CapEx of 3% to 4% of revenue. With that, I will hand the call over to the operator for any questions. Thank you. Please open the line for questions.

[Operator Instructions] Currently we don't have any questions coming from the phone lines at this time. [Operator Instructions] It seems there are no questions from the phones at this time.

Okay. And we'll end the call today. We appreciate everyone joining for this quarter's call, and we look forward to speaking to you next quarter. Thank you, and have a good day.