Archer Limited (ARCH) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Archer Third Quarter 2023 Earnings Release Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. [Operator Instructions] I will now hand over to our host, Dag Skindlo, Chief Executive Officer, to begin. Dag, please go ahead.

Thank you, Charlie. Good morning, ladies and gentlemen, and thank you for joining the conference call for the third quarter 2023. 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 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 includes forward-looking statements as well as non-GAAP financial measures. Forward-looking statements do not guarantee future performance 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. First of all, very pleased to report that we keep growing and taking market share. Revenue in the quarter of $303 million represents an increase of 26% year-over-year despite unfavorable movement in exchange rates. Archer delivered record level EBITDA for the quarter with adjusted EBITDA of $32.3 million, while reported EBITDA came in at $30.7 million. The growth in adjusted EBITDA compared to previous year was 37%, while the EBITDA margin exceeded 10%. The growth in EBITDA was accomplished through the combination of solid revenue growth and margin expansion. Especially, Well Services delivered strong results in Q3 and reported the highest EBITDA ever, contributing to about 45% of Archer's EBITDA in the quarter. EBIT for the quarter amounted to $16.6 million or 5.5% of revenue. We continue to be on track to reach our 2023 guidance, and we expect EBITDA grow by close to 35% compared to previous year. The adjusted net income is positive, coming in at $3.7 million. The adjusted net income reported excludes income and costs such as market-to-market changes in financial instruments, debt fee amortization, sale of assets and effect of currency fluctuations in order to highlight the underlying profitability of Archer's operations. Slide 4, please. In the third quarter, revenue in the Well Services segment continued to increase and ended at $82.9 million, an 8% increase from previous quarter. EBITDA for the quarter ended at $13.9 million, which is, as mentioned, the best quarterly EBITDA from Well Services ever. This segment has delivered just under 20% annual organic growth over the last 5 years with EBITDA growth of more than 50% this year. Preliminary estimates for 2024 indicate that we are back on historic organic growth rates around 20%. The increase in our activity is a result of increased demand for our products and services as well as contribution from our acquired businesses. With such strong quarter, many operations and sales take place, but I want to highlight positive contribution from the contract operation at Visund in the quarter. Following establishment and growth of our Well Services division in the Brazilian offshore market in recent years, we were awarded a strategic contract with Petrobras to develop new proprietary technology for P&A of deepwater wells in Brazil. It is an important award for us as we have strengthened our relationship with Petrobras as well as being given an opportunity to prove our ability and capability in developing purposeful technology for their requirements in the deepwater offshore wells. Successful development and commercialization of the method and tools will open up a large market for Archer. Next slide, please. Revenue in platform operations increased by 7% from last quarter, ending at $139 million. Following a soft Q2, EBITDA increased by 46% from previous quarter, ending at $14 million. Increased EBITDA revenue was impacted by the successful completion of a quick P&A campaign in New Zealand for [ Orme ], improved uptime to pass on our P&A project in the U.K. and overall improved performance in Platform Drilling & Engineering. Following solid deliveries within both our Engineering & Platform Drilling segments, we have received several performance incentives across clients for both Platform Drilling & Engineering in the quarter. Our drive to support our customers' objectives are increasingly giving us a better position to integrate with our customer and to win more work. Our Modular Rig Emerald arrived in the U.K. at the end of September and is currently undergoing recertification and being prepared for the Fulmar contract for Repsol. Our Platform Drilling operations was impacted by a party U.K. decision to reduce their drilling activity in the quarter, but this had limited impact on Archer's overall results. Next slide, please. Decommissioning of platforms and wells is significant and will offer companies like Archer substantial growth opportunities. The growth in this market comes in addition to the current strong overall activity increase in the industry. We see a high demand for P&A and decommissioning services going forward. The strongest activity and near-term increase in the decom market is in the U.K, where operators will spend an estimated $26 million within 2014. As evidenced by the integrated P&A Fulmar contract awarded larger in the third quarter, we are well positioned to service our customers to permanently P&A their wells. The global offshore decom market is expected to grow more than 100% over the next 10 years. This market, which only to a lesser degree, is impacted by fluctuations in the oil price will underpin profitable growth for Archer for decades to come. The permanent P&A of oil and gas well is an essential activity to curb global emissions and protect the environment. Our goal is to industrialize the P&A process and spearhead innovation to cut operators' decom costs globally. Archer is uniquely positioned with a combination of drilling and a broad well services offered to both production enhancements and decommissioning wells. We have extensive experience and holds the most advanced portfolio of [ natures ] in the industry. These are technologies we have developed organically and also acquiring some small acquisitions. Some interesting facts on decom and P&A. About 50% of offshore decom spend is well P&A. About 40% of the global offshore decom activity will take place in the North Sea. U.K. is first and have the largest decom liability in the North Sea and internationally. Global offshore decom market to increase more than 100% in the next 10 years. Globally, the sixth largest IOC to international majors have between $12 billion to $22 billion each in decom liabilities. And again, as mentioned already, the permanent plugging and abandonment of oil and gas wells is an essential activity as the world decarbonize on the road to net 0 and is a growing market going forward. Next slide, please. In the graph to the left, we illustrate the decommissioning commitment by operator in Denmark, Norway and U.K. In the North Sea, more than 25,000 -- more than 20,500 offshore wells have been drilled, of which some 11,600 are in U.K., 6,200 in Norway, 270 in Denmark and 2,100 in the Netherlands. All of these wells have to be permanently drilled and abandoned, and all the 6 installations and sub installations need to be decommissioned and removed. It is a massive task, where Archer is preparing to be the market leader for well P&A. We estimate $32 billion to be spent between now and at the end of 2039, of which between $13 billion to $16 billion or 50% will be spent on Drilling and Well Services, which is the key market for Archer's services. Fulmar project represents less than 10% of Repsol's well spend in the next 17 years, and this shows the importance of aligning with larger players. Equinor has the largest decom liability in Norway, but the majority cost will come after 2040. Archer is currently planning the P&A campaign for [ Star A ], where the platform will be lifted off in 2027. We are tightly integrating Equinor for planning, and the Drilling and Well Service team will be the lead contractor for this operation. This is building the track record for larger scope contracts also in Norway. Being part of Equinor and [ KLX ] and their late life group, this is a great position as more assets mature and enter late life operations. Next slide, please. Our revenue from land drilling activity came in somewhat lower than the previous quarter, but at levels in line with the preceding quarters. The revenue reported in U.S. dollars was negatively impacted by the sudden and dramatic depreciation of peso in August following the results from the primary elections. However, the cost in new teams reduced. So impact on devaluation inflation on EBITDA was in the $700,000 range for the quarter, was 2% to 3% of the quarterly overall EBITDA. Over time, we are not significantly impacted by fluctuations in currency and inflation in Argentina. Sometimes they do not move in cadence and you can make a gain or a loss. EBITDA ended at $6.1 million, in line with our forecast and expectations as we did predict uncertainty during the election period. During the quarter, we incurred $0.5 million in severance payments related to down-manning and not the least, retirements. The general activity for our Land Drilling division remained stable and the number of active drilling rigs during the quarter remained at 11. One pulling rig was, however, demobilized. Operational performance continues to be solid with minimal downtime. However, we had less opportunity to make performance incentives related to well program during this quarter. The Argentine market continues to be unstable. And after the election, we expect financial and political uncertainty to continue. However, our clients' current drilling program will support similar activity in 2024 and in 2023. Our operations in Argentina and the oil and gas industry in the [ Baco Nato ] Basin is also shadowed by the development in the Argentine economy. However, the oil and gas production in this region has grown substantially and is set to grow further. There are certain constraints in both infrastructure and service provisions in the area. But given these constraints are sorted out, this still indicates that a reduction from [ Baco Nato ] could reach 1 million barrels per day by 2030. The drilling and new wells is at the same as per graph to the left. The major constraints are infrastructure and number of rigs in order to achieve this production level. Multiple infrastructure pipelines have been sanctioned and the gas capacity was increased by the opening of the first [ stage executioner ] pipeline in July this year, while the oil takeaway capacity will be increased by new pipelines to be operated over the coming years. Argentina is clearly dependent on development of its vast resources while meeting demand and also to generate very much needed U.S. dollars to export. In these uncertain periods, it is worth remembering, Archer is a leading drilling contractor with high-spec drilling rigs weeks in North America. Inflation and currency fluctuations are largely natural forces of earnings over time. Main challenge is currency restrictions limiting new investments and getting cash out of the country. However, Archer has taken out $66 million of cash in 2015, of around $4 million in 2023. So overall, a good story. We will continue to drive the business and generate good returns. With that, I hand the word over to Espen.

Thank you, Dag. Looking at Slide 10. Total revenue in the quarter of $302.7 million represent an increase of $62.5 million or 26% increase from the same quarter last year, driven by increased activity in all our business areas. With an underlying EBITDA of $32.3 million, our adjusted EBITDA margin ended at 10.7%. After adjusting for exceptional items of $1.7 million in the quarter, EBITDA ended at $30.7 million. This is an increase of $7.8 million or 34% compared to third quarter last year. As already mentioned, the increase in EBITDA is attributable to general increase in activity driven by international growth with higher contribution. In addition, we had a stronger quarter related to performance incentives across all divisions. Our net interest expense in the third quarter is currently reflecting the normalized drawing on our facilities and bonds. The debt fees incurred in relation to the refinancing will be amortized over the duration of the loans, and we have singled out this line item in the P&L. For Q3, this amortization of prepaid debt fees amounted to $2 million, which will be stable going forward. Net income for third quarter ended at negative $2.5 million. However, as Dag mentioned in the introduction, the adjusted net income when removing impact from items such as impairments, foreign exchange impact, mark-to-market movements on financial instruments and so on, adjusted net income ended at positive $3.7 million. Next slide, please. Moving to Slide 11, we note that cash and cash equivalents at the quarter end was $75.8 million. The restricted cash balance of $0.5 million is a reduction compared to the December '22 and is explained by the implementation of a guarantee for employee tax for Norwegian employees. Equity of $179.6 million increased by roughly $100 million from end of 2022, as a result of the private placement of $100 million in March 2023 and the conversion of the subordinated-related party loan of $15.9 million. Over the quarter, we fully divested our shareholdings in KLX Energy Services for a total consideration of $10.4 million for the full year 2023. In order to facilitate the growth over the year, we have invested in our inventory to meet growth in Well Services internationally and for our new technologies, and we also see impact on working capital on the increase in our receivables on the back of increased activity and revenue. Slide 12, please. In the graph to the upper left, we display the development in last 12 months EBITDA and adjusted EBITDA. We are very pleased with this general trend as we see a 32% growth in EBITDA. Following these metrics through the mid graph below, we are extremely satisfied with the reduction in leverage ratio over the last quarters. We are currently at a comfortable debt levels, and we see that our ability to grow is impacting these important metrics for us as the beat pace. Next slide, please. We are reiterating our financial guidance for 2023. We are well on track to reaching these key metrics, and we are aiming to end the year close to the upper interval of the guided revenue and EBITDA. Archer see solid improvements in financial performance in 2023 compared to 2022 on the back of a strong backlog and market positions. Revenues for 2023 is guided to increase by 15% to 20% compared to 2022. EBITDA for 2023 is expected 30% to 35% higher than 2022. CapEx is still between 3% to 4% of revenue. To sum up, we are uniquely positioned to capture the growing P&A and decommissioning market, enabling us to grow within production and P&A for the next 20 to 30 years. As we announced in August, Repsol awarded us an integrated decommissioning contract, where we will execute the plug and amendment of 30 wells in the Fulmar Field and 2 wells in the Halley Field. This contract will drive growth in the coming years while also showcasing the potential for Archer to further grow in this market as we're tendering for 2, 3 contracts similar in magnitude. We have proven our ability for accretive bolt-on acquisitions. There are more opportunities for accretive acquisitions in the current market, and we continue to explore these. And finally, we continue to be committed to the energy transition and net 0 target in 2050. And in our commitment towards these targets, we are going to help our customers and clients' targets to reach their goals. With that, I will hand the call over to the operator for any questions. Thank you. Charlie, will you please open the line for questions?

[Operator Instructions] We currently have no questions registered on the call. So I'll hand back over to Espen Joranger for any further remarks.

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

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.