Archer Limited (ARCH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Archer Limited First Quarter 2023 Earnings Release Call. [Operator Instructions] I would now like to turn the conference over to Dag Skindlo, CEO of Archer Limited. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen, and thank you for joining this conference call for the first quarter 2023. Archer's Chief Financial Officer, Espen Joranger, is joining me on today's call. In today's call, I will touch upon the key highlights and summarize Archer's operation for the first quarter. Espen will thereafter walk us through the financial section and the outlook. Towards the end of the call, we will open the line for questions. Moving to Slide 2. I would like to note that information provided in today's call include forward-looking statements as well as non-GAAP financial measures. Forward-looking statements do not guarantee future performance or -- and involve risks and uncertainties. Actual results may differ materially from projections. Further information about these risks and uncertainties are set forth in our most recent annual report for the year ending December 31, 2022. Next slide, please. I am pleased that we are growing and delivering strong financial results in the first quarter of the year. The growth is driven by solid operational performance and improved market conditions. Revenue in the quarter of $266.6 million represents an increase of 22% year-over-year despite unfavorable movements in the foreign exchange rates. EBITDA for the quarter came in at $25.2 million, representing a 55% increase compared to last year. First quarter is typically a soft quarter for our operations due to seasonality and less operating days. However, as mentioned, we are pleased to report strong EBITDA again -- generation in accordance with our financial guidance. As I will come back to later on the call, we had a busy quarter and managed to reduce our net interest-bearing debt considerably. Reduction in NIBD was, of course, explained by a large extent by the received equity issuance in March, but also our operational performance, efforts and focus on cash management contributed to improved liquidity and reduction in NIBD. The pro forma NIBD was $18 million ahead of projections provided during our equity raise. On the back of the solid quarter, a positive view on the market and our contract backlog, we are on track to reach our financial guidance for 2023. We integrated Romar Abrado in the quarter and strengthened our well services division, capabilities and product offering through this acquisition. We also joined forces with Baker Hughes U.K. coil tubing business at the end of the quarter, and both of these transactions are accretive to Archer and improves our service offering. Slide 4, please. In the first month of 2023, we have successfully refinanced $576 million of our debt. We have worked with existing and new stakeholders to protect the value for all parties involved, at the same time, provide a solid platform for future growth. The new financing structure includes a new $250 million first-lien bank facility provided by DNB, SEB and SR-Bank where SR-Bank is a new bank in the syndicate. A new 200 second-lien bond, we converted the CB of $15.9 million to equity. And lastly, an equity raise of about $100 million, of which our shareholders contributed with more than 50% of new capital. And our 2 largest shareholders remain Paratus Energy and Hemen. Pro forma net debt after the refinancing completed is estimated at $395 million, equaling an opening leverage of 3.5 base on midpoint guidance for 2023 EBITDA. The new financing has maturity in 2027, offers competitive cash interest costs estimated at 7.5% over the period. This estimate is based on our financial projections under SOFR forward curve. Including the payment in-kind element of our bond coupon, we estimate that our total borrowing cost [ is up to about ] 10% over a 4-year period. We regard this as competitive pricing when we look at other players in the market. New financing package will allow us to take advantage of the next oil service upcycle. We will continue to focus on our profitable growth and deleveraging, and at the same time, execute on accretive bolt-ons within the Well Services segment. Slide 5, please. The growth in revenue and EBITDA can be further split between our 3 reporting segments: Platform Operations, Well Services and Land Drilling as per the graph on Slide 5. The growth compared to previous years is evident in all segments. Focusing on EBITDA for now, we noticed that the 33% increase -- 38% increase in EBITDA for our Platform Operations segment is the lowest year-over-year growth. Well Services had a growth of 59%, while Land Drilling grew by 120% compared to last year. The modest growth in revenue and EBITDA in the Platform Operations is muted by unfavorable foreign exchange movements in NOK and GBP. Slide 6, please. In the first quarter, revenue within the Well Services segment continued to increase and ended at $68.7 million, a 5% increase over previous quarter. Romar Abrado is included in the quarter, while the U.K. coil tubing business acquired from Baker Hughes will only impact financials from April onwards. Pulled through from the increased revenue combined with margin expansion led to a 16% increase in EBITDA over the quarter, ending at $7.9 million. Adjusting for the integration expenses for Romar Abrado classified as exceptional items, the adjusted EBITDA came in at $8.3 million. The increase in revenue is a result of decreased demand for our products and services, and we recorded our first wireline operation in Brazil. In addition, we expanded our presence in Guyana by establishing our workshop facility to better serve our customers there. Before moving onward with the slides, I wanted to briefly touch base on -- acquisition of Romar Abrado and Baker Hughes U.K. coil tubing business. The coil tubing and pumping business fits well with our brownfield and P&A strategy and allows us to broaden our integrated P&A services in the U.K., while Romar Abrado expands our capabilities within the work of operation and well abandonment. Both acquisitions are highly accretive to our financial metrics. These acquisitions, combined with in-house product development and innovation, have resulted in the broadest and the most advanced P&A tool offering within the industry. Here, we are taking the opportunity to buy at very accretive EBITDA multiples. For example, Baker needed to divest and could not and would not sell to any other provider of coil tubing in the U.K. There are similar opportunities like Romar Abrado and Baker Hughes coil tubing business out there. There are not many buyers, but there are several owners looking to exit. Archer has a clear strategy of participating in the consolidation of Well Services. Next slide, please. Revenue from Platform Drilling, engineering and our modular rigs were fairly stable around $120 million. When looking at the operational revenue, which excludes low-margin reimbursement revenue, the increase over the quarter was 3%. Compared to Q1 2022, the operational revenue reported in U.S. dollars was fairly stable. Platform Operations segment is most impacted by movement in NOK and GBP ForEx movements compared to first quarter of previous year. The GBP has weakened by 9% and the NOK has weakened by 13%. As such, the revenue reported in U.S. does not reflect the underlying increase in activity within the reported segments. EBITDA in the quarter came in at $12.7 million, a reduction of 15% compared to the previous quarter. This is, to a large extent, explained by a one-off effect from rate escalations, including our Q4 EBITDA for Platform Operations. The increased underlying activity is partly a result of one additional drill rig commencing drilling operation in Norway. Our 2 modular rigs that are critical for multiyear P&A projects. Emerald has been in New Zealand and will, during this year, return to the U.K. Topaz started the 3-year P&A program in the U.K. late Q1, and you will see the full impact of this operation in Q2. We believe these 2 rigs have significant potential within the P&A programs over the next decades. Next slide, please. Our revenue for Land Drilling was stable at $80 million compared to the previous quarter. Also, EBITDA was fairly flat at $7 million compared to the previous quarter. We incurred $1.8 million in severance payments in the quarter related to down-manning and retirement, mainly related to reduced workover activity, which will be offset by an additional drilling rig. Operations in Argentina is solid with increased bonuses and less nonproductive costs. We have upgraded another drilling rig to high spec in the quarter and the rental of one of our rigs in Bolivia commenced. Inflation in Argentina remains high. We are, in general, accustomed to ensure inflation is compensated for in our customer contracts. However, Argentina continued to experience political and financial instability. And with the elections coming up, we are expecting to see more volatility going forward. With that, I hand the words over to Espen.

Thank you, Dag. Looking at Slide 9. Total revenue for the first quarter amounted to $264.3 million. We experienced increased activity across our business segments in the first quarter, leading to 22% increase in overall revenues despite the mentioned impact from unfavorable foreign exchange movements in the quarter. EBITDA before exceptional items for the first quarter grew by 30% compared to same period last year, ending at $27.2 million. Exceptional items in the quarter of $2.2 million mainly relates to severance payments related to down-manning and retirements in Argentina, including $0.3 million related to integration costs for Romar Abrado. Strong reported EBITDA of $25.2 million based on increased performance and higher activity. Other financial items of negative $15.7 million relates to foreign exchange losses of $9.1 million and negative market-to-market adjustment for the shares in KLX Energy Services of $6.4 million. A significant portion of the foreign exchange loss relates to internal funding in NOK between Bermuda and Norway and has no cash effect. Net income for the first quarter ended at negative $17.9 million compared to a positive result of $13.9 million last year. The net result was negatively impacted by the mentioned unfavorable foreign exchange rates and the market-to-market adjustment for KLXE. Next slide, please. The balance sheet as per March 31 does not reflect the completed refinancing, which was not finalized until end of April. The increase in cash over the quarter reflects the equity issuance from March of $100 million. These proceeds was used to repay our multicurrency loan facility in combination with the proceeds from the new loan facility and the bond issued, both which was closed in April, and hence not reflected end of March. Net interest-bearing debt came in at $387 million, a reduction from $506 million from the end of fourth quarter 2022. The reduction in NIBD includes the impact from the equity issuance, but neglects certain fees and costs, which we incurred after March 31. So we estimate that if all aspects of the refinancing would be reflected, the pro forma NIBD would be a bit higher, around $395 million. Book value of our equity was $160 million end of first quarter, which does not include the conversion of the subordinated loan nor the proceeds of the rig payer offering, which was completed in April. The loan facility, which we refinanced in April is recorded as long-term debt in the first quarter aligned with U.S. GAAP. Slide 11, please. We are reiterating our financial guidance for 2023, and we confirm we are on track to reaching these targets. We have a solid backlog, and we see a considerable improvement in our Well Services segment and are expecting to see a 65% to 75% growth in EBITDA for 2023 in this business segment. We predict that this segment will account for more than 40% of our total EBITDA this year. We expect a moderate growth in our Platform Operations segment in 2023 over 2022. The expectation for our Land Drilling segment is to grow EBITDA by 25% to 40% in 2023. We have a better backlog and contract coverage for our rigs compared to 2022 and remains optimistic that Argentina's oil and gas infrastructure projects will increase rig demand going forward. Archer expects continued solid improvements in financial performance in 2023 on the back of the strong backlog and market position. Revenues for 2023 is expected to increase by 10% to 20% compared to 2022. EBITDA for '23 expected to increase 25% to 35% more over 2022, growth primarily in second half of 2023. CapEx between 3% to 4% of revenue in line with previous years. With that, I will hand the call over to the operator for any questions.

[Operator Instructions] So it seems like we don't have any questions at this time. And I would like to turn back the conference to Dag Skindlo for closing comments.

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

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.