Archer Limited (ARCH) Earnings Call Transcript & Summary

Good morning or good afternoon, and welcome to the Archer Limited Q4 2023 Trading Update and 2024 Outlook Presentation. My name is Adam, and I'll be your operator today. [Operator Instructions] I will now hand the call over to Dag Skindlo to begin. So Dag, please go ahead when you are ready.

Thank you, Adam. Good morning, ladies and gentlemen, and thank you for joining this Q4 trading update and 2024 outlook presentation. My name is Dag Skindlo, CEO of Archer. I have been with Archer since 2016, but in my current role since early 2020. I have a long and international career behind me in the industry, working for large service companies like Schlumberger and Aker Solutions. With me, I have Espen Joranger, our CFO. Espen has been with Archer since 2013, in the first years as Financial Director for North Sea and Group Controller before he became the CFO in 2020. What best summarizes Archer is our slogan. We are the well company. What we do is to drill wells and provide tools, technology and services to ensure that the well is performing. We are now a sizable company close to $1.2 billion in annual revenue and more than 4,800 employees worldwide. We have overtime transformed our business mix and exposure. If you look back to 2016, we were largely a company performing platform operation and land drilling. Since then, we are focused on growing within Managed Services, our business segment, which contributes with more than 40% of our EBITDA. Our solid performance in 2023 resulted in an EBITDA of $117 million. In average, our EBITDA growth has been about 16% each year since 2020. And with the current market backdrop, we think we can continue this growth going forward. Next slide, please. Before we move on, I will call your attention to the disclaimer regarding forward-looking statements and our use of GAAP and non-GAAP performance measurements. Moving to Slide 4. First, we wanted to summarize the key messages in this trading update. We delivered a record fourth quarter, resulting in a 14% EBITDA increase year-over-year. Following a series of record quarters delivered in 2023, full year EBITDA ended at $117 million, representing a 36% increase compared to last year. This growth exceeded the upper range of our full year EBITDA guidance and demonstrates that our strategy is paying off and that our key markets support continued growth. Strong growth and operation cash flow in 2023 as well as the refinancing in the first half of the year has reduced Archer's leverage ratio to 2.9 at year-end compared to 5.3, 1 year ago. For 2024, we expect a 15% to 20% EBITDA growth, continuing our positive trend. On the back of solid growth and operational execution, we foresee a further reduction in our leverage ratio to between 2.4 and 2.7 during 2024. Next slide, please. We have several quarters delivered solid growth. Our fourth quarter is no exception, with an EBITDA of $30.9 million on the back of a total revenue of $305 million. The year-on-year growth is -- in quarterly revenue is 15%, which translates to roughly the same year-on-year growth in our adjusted EBITDA, which ended at $33.4 million in the quarter. We have grown our EBITDA by 10% each quarter in average since the first quarter of 2022. This EBITDA growth clearly demonstrates our ability to grow both organically and by accretive M&As. On the Wednesday this week, we announced the award of additional $125 million contracts awarded in Argentina by Pan American Energy, which I will elaborate on later. Slide 6, please. 2023 has been a rewarding year for Archer. The year-on-year growth in our revenue was 20%, resulting in gross revenue of close to $1.2 billion. The general activity growth across all divisions, combined with margin expansion, resulted in 36% EBITDA growth in 2023. As mentioned, we believe the market fundamentals for our services will continue to support our growth, and we forecast further EBITDA growth of 15% to 20% in '24. We started the year with an important refinancing of the company, moving the maturity of our facilities into 2027. We expanded our service portfolio by acquiring Romar-Abrado and further strengthen our business portfolio in the U.K. by acquiring Baker Hughes coil tubing business. In August, we secured a large multiyear integrated P&A contract in the U.K., demonstrating our unique service offering within the growing P&A market. We also continue to innovate and sign a development contract with Petrobras for their subsea well P&A challenges in Brazil. Cash contribution increased by 14% from '22 to '23, and we expect cash contribution to increase as we grow the business. Next slide, please. As the heading indicated, we delivered ahead of our 2023 promises. We forecasted a revenue growth of 10% to 20% in 2023, and we ended up at the end -- and we ended at the upper range of the interval. For EBITDA, we positively stated that we would be able to grow our EBITDA by 25% to 35% in '23 compared to '22. Despite unfavorable foreign exchange movements, in both Argentina -- Argentine pesos and Norwegian Krones over the year, we surpassed our guidance and grew EBITDA by 36%. Prepared for further growth in all our business lines, we exceeded our CapEx guidance, and we report capital expenditure for '23 at roughly 4.4% of revenue. The strong operational performance in land drilling has allowed us to reinvest local pesos in hard assets and capital equipment. We have upgraded and recertified a rig Vaca Muerta, which will start drilling in Q1 this year. And we acquired 3 drilling rigs from H&P in December 2023, which will drive EBITDA growth in 2024. Moving to Slide 8. One of our absolute primary target is to delever Archer over time. Our focus is to generate positive cash flow to reduce our net interest-bearing debt, while increasing our operational results to ensure that the leverage ratio come down. Reduced leverage ratio will reduce cost of capital and increased cash flow to equity. Over the last years, through by the refinancing in '23, we have reduced our leverage ratio to below 3 compared to 9.5 back in 2016. Our focus and devotion to delever will continue also going forward, continuing a part from roughly $800 million in net debt in 2016 to be $400 million on the turn of 2023. Through the refinancing and some operations, we have sufficient liquidity, which totaled $77 million at the end of the year. Having learned some lessons from earlier booming cycles, we will continue our CapEx discipline and cost control to ensure that our growth is sustainable. Compared to peers, our CapEx levels remain modest. Moving to Slide 10. We continue to be optimistic about the development of the oil service industry in general and for Archer in particular. We start to see continued long-term growth in both the number of wells -- well interventions to be executed in Archer's core markets and an even more elevated growth in the number of wells to be decommissioned in the years to come. Looking at our core market areas, we anticipate a particular high growth rate for operations in the U.K., driven by increased well P&A activity and a broader offering within Well Services following the acquisitions of the coil tubing business under Romar-Abrado during 2023. We have suddenly currently value chain in the U.K. As we will outline later, our growth has been particularly high in our Well Service division, and this growth has been driven by international expansion. International growth within Well Services is set to continue as they are large untapped market for our services. In Norway, we have a very strong market position for both Platform Operation and Well Services. We will continue to drive operational excellence and increase our offerings, exploiting our large organization and presence on platforms to drive margin and revenue also going forward. Argentina has a meaningful growth potential in the medium-to-long term, given that the country is successful in developing their vast oil and gas resources. We are pleased with our growth in Argentina over the recent years, and we are close to reaching our pre-COVID level of EBITDA in 2024. Next slide, please. We received positive market fundamentals for Archer's P&A service offering for several decades ago. Decommissioning is a term used to describe a final stage 1 energy project. In oil and gas, when a field production cycle comes to an end and all the economical fuel has been processed, the facilities must be dismantled and surrounding air returns to it's natural condition. This process involves plugging the well and removing infrastructure. The offshore decommissioning market is huge and is to estimate the liability of operators to represent some $200 billion globally. Of the total decommissioning activity, roughly 50% is related to the plugging and abandonment of the wells, which is Archer's core competence. The potential is particularly high in overall market with an estimated $80 billion in total decommission spend or some 40% of the global activity. The strongest activity and near term increase in the decom market is in the U.K., where operators will spend an estimated $26 billion towards 2040. The global offshore decom market has grown considerably in the last few years and is furthermore expected to grow by more than 100% over the next 10 years. This market was only, for lesser degrees, impacted by fluctuations in the oil price, will underpin profitable growth for Archer for decades to go. Other unique -- Archer offers a unique combination of drilling operation and a broad set of Well Services fitted for the plug and abandonment tasks. As Archer's strategy to become the preferred P&A service provider in the industry. Archer has developed a cutting-edge technology within P&A and decommissioning over the years and recent acquisitions have complemented our internal service offering, which has resulted in Archer having the broadest and most advanced P&A tool offering within the industry. Slide 12, please. As you noted in August, Repsol has awarded an integrated well decommissioning contract to Archer, where we will execute the plug and abandonment of 30 wells on the Fulmar Field and 2 wells on the Halley Field. The contract is a fully integrated P&A project, covering the complete work scope, including drilling services using modular drilling rig and approved suite of well services. Next slide, please. This slide gives an overview on how we position our services in P&A as well as how we strategically develop additional technologies and services. Our core technologies are centered around P&A services platforms, where we performed drilling services the existing drilling facilities or deploy a modular drilling rig. From a Well Services perspective, we can offer the broader and most advanced services and choose to plug and abandon the well. On Platforms, there is a drive from operators to be able to perform more of the world's scope off-line without use of the drilling facilities. In this respect, Archer's work with several of our clients to develop offline capabilities using pulling units, wireline and coil tubing to perform offline work. For Subsea Well, the majority of the drilling services needs to be performed by mobile offshore drilling unit, MODU. Archer does not perform drilling services for Subsea Wells. But again, we have the broadest and most advanced well service offering. For Subsea Wells, the drive is to perform increased scope from a light well-intervention vessel before the scope is completed by a more expensive MODU. An example here is the development project with Petrobras, where we want to develop a solution where we plug their subsea wells using coil tubing from a vessel. Successful development can potentially open a large market for Archer. Note, the method and technology to plug and abandon wells are in continuous development, and Archer is committed to be a leader in this space. Next slide, please. Platform Operation is one of our 3 key business divisions with about 35% of our EBITDA. Archer is managing the drilling operation on above 50% of platforms in the North Sea. This is a stable brownfield business with strong cash generation. It has contributed about $40 million in annual cash contribution over the last 4 years, even during COVID. We have a significant contract portfolio with the North Sea major Equinor. As a testimony to our service quality and the performance we deliver, we have overtime managed to and secure market share with Equinor of above 50% on the platform. In addition to being a great standalone business, Platform Operation enable us to upsell our Well Service business. As you might understand, being present on above 40 location in North Sea, gives a significant competitive advantage in this respect. We own 2 model rigs that are particular critical from multi-year P&A projects. One rig is being prepared for the Repsol contract to commence offshore drilling operation in '25, while one is operating already under 3-year P&A program in the U.K. TAQA. These 2 rigs have significant potential within the P&A market over the next decades. In 2024, we anticipate a modest reduction in activity, driven by lower activity for our modular rigs with only 1 active. While it means 25 of backlog suggest increased activity above 2023. For 2024, our focus area will be to ensure excellence in our operation and increase drilling efficiency to support our customers' ambitions to increase production on their platforms while maintaining safety in all we do. Furthermore, we will continue the work we do to position and tender large P&A contracts like Fulmar. Slide 15, please. Our Well Services division is our most valuable business division today. In this division, we offer tools, technology and services that help improve well performance and in the end, closed down the well. We divide Well Services into wireline lifts and coil tubing. The wireline Services business has a strong backlog for leading customers. Oiltools is our core tech business that is growing internationally, while coil tubing is larger U.K.-centric business. Archer's Well Services division delivered an impressive 57% EBITDA growth in 2023, of which approximately 40% was organic. The division has delivered an organic compounded average growth rate of 26% in the period from 2017 to 2023. The company expects continued strong EBITDA growth from this division in 2024. When adjusting our revenue for reimbursement revenue, which is a pass-through revenue related to one of our wireline contracts, we are also pleased with a continuous margin expansion in the business. The margin expansion is a reflection on the expanding volume and international presence with higher prices. As oil market in Norway, from this business, is mature, our focus for 2024 is to continue our growth international in Well Services. Next slide, please. Our operation in Argentina, the oil and gas industry in Vaca Muerta Basin is often overshadowed by the development on -- in the Argentine macro economy -- economics. However, the oil and gas production in the region continues to grow. Attractive oil and gas resources are in place in Vaca Muerta where Archer is well placed in high-spec rigs and a good market position. The drilling services market is expected to improve as new transportation infrastructure is coming in place. Land Drilling delivered strong operation and financial results in 2020. The strong operational performance in Land Drilling has allowed us to reinvest local currency and build for the future. Firstly, we mobilized more additional rig in Q2 with increased activity in second half of '23. Secondly, we upgraded and recertified an additional rig in Vaca Muerta, which will start drilling in Q1 this year. Lastly, we acquired 3 drilling rigs from H&P in December 2023, which will drive EBITDA growth in 2024. In '23, we used an uncertain political and financial situation in Argentina to focus on service quality, capitalize on opportunities and build for the future. We expect our Land Drilling EBITDA to grow about 15% to 20% in '24 following the deployment of an additional drilling rig and new contractors. Inflation, currency fluctuation is in general, large generator for Archer's EBITDA over time, so was in '23, with devaluation of more than 350% and inflation of roughly 210%. However, the revenue reported in U.S. dollar will fluctuate as inflation and devaluation develops. With current productivity, inflation and devaluation rates, we have concluded not to guide on revenue 2024. However, again, we are able to forecast 2024 EBITDA as our contracts and cost base minimize impact from inflation and devaluation on EBITDA. Currently, there are restrictions on repatriation of U.S. dollars out of Argentina. However, Archer has taken out net $66 million of cash in 2015, of which $4 million in 2023. All investments and growth in Argentina is self-funded. For 2024, we will focus on improving operational efficiency of our rig fleet. We will see possible future devaluation events occurring in '24 and will take protective measures against negative effects from further devaluations. Furthermore, we will relentlessly seek opportunities to [ repatriate ] cash for more Land Drilling business. As we announced on Wednesday, we are pleased with the award of 2 contracts by our long-term customer in Argentina, Pan American Energy, totaling $125 million in value. The first contract is a 2.5-year extension. We improved conversion terms with H&P rigs both in Q4 that will replace the 3 drilling rigs currently operating by Pan American's Cerro Dragon field. The contract extension has a value of approximately $100 million and runs until the fourth quarter of 2027. The second contract is for one additional drilling rig in Vaca Muerta. This contract has a value of roughly $25 million over 2 years. The rig will mobilize in the first quarter of 2024. Due to the economic instability, Argentina is a challenge from an ownership perspective. However, the oil and gas activity in the country is good and the new political leadership has expressed a clear intent to enhance drilling and production activities. These new contract awards improves the visibility and profitability of our local operations, and we believe this over time will result in further value creation for Archer shareholders. Some of the investments reported in the fourth quarter are linked to these contracts and enable us to secure additional work in Argentina. Moving to Slide 18. Archer expects solid improvements in financial performance in '24 compared to '23. This is based on backlog, current activity level, market growth and our market position. We estimate a further EBITDA growth of 15% to 20% in '24. CapEx is expected at somewhat elevated levels compared to historic levels to support growth, including Emerald recertification and upgrade for the Fulmar project. CapEx is expected to amount to between 4% and 5% of revenue. With further growth in cash flow generation, we expect to end 2024 with a large ratio with -- we expected in 2024 with a leverage ratio between 2.4 and 2.7. Next slide, please. Before opening up this presentation and open up for questions, I want to summarize some investment highlights for Archer. Firstly, our growth rate is a catalyst for value creation for our shareholders. Secondly, we have delevered, and our leverage ratio is expected to be half from '22 to end of '24. As you know, reduced leverage ratio will reduce cost of capital and increased cash flow to equity. Thirdly, we believe there is limited market downside for Archer given the brownfield and growing P&A activity. This has also been demonstrated historically when we have largely maintained earnings in challenging times. And finally, we note that our current valuation multiples remains far below our historic trading averages, below the multiples of relevant peers. And finally, below the valuation multiples that is following Archer's estimating at fair multiples. The ultimate purposes and target of our strategy remains to create shareholder value for our owners. We believe the best way to create shareholder value is to grow and delever, enhancing our flexibility both financially and operationally in the years ahead. With that, I will hand the call over to the operator for any questions.

[Operator Instructions] We have a question from Lucas Du from Market.

Dag, did you -- I just didn't quite catch it. Did you acquire 3 rigs in Argentina in December? Was that what you said?

Yes, we did. We acquired 3 rigs from H&P at very attractive terms in combination with our new contracts.

Okay. And you have already paid for them in 2023, or is that something that is incorporated in your '24 guidance?

No, we have paid for the rigs in 2023. What we would pay for in 2024 is the final -- standup of the rigs, but you can say the cash -- the CapEx that we have in '24 related to these rigs will stand up of the rigs, is offset by mobilization fees that we receive at the time we mobilize the rigs. And so it's largely cash neutral. The CapEx for these H&P rigs in '24 versus the mobilization fees we are receiving from the clients. So we're kind of taking cash in 2023.