Archer Limited (ARHVF) Q2 FY2025 Earnings Call Transcript & Summary

Hello, everybody, and welcome to the Archer Second Quarter 2025 Earnings Release Call. My name is Elliot, and I'll be your coordinator today. [Operator Instructions] I would now like to hand over to Dag Skindlo, CEO. Please go ahead.

Thank you, Elliot. Good morning, ladies and gentlemen, and thank you for joining our second quarter earnings call. Archer's Chief Financial Officer, Espen Joranger, is joining me on the call today. In today's call, I will cover key highlights, the business outlook and comment on recent acquisitions and investments, while Espen will thereafter summarize Archer's operations for the second quarter and walk us through the financial section. Towards the end of the call, we will open the line for questions. Moving to Slide 2. As always, I'd like you to note the information provided in today's presentation includes forward-looking statements as well as U.S. -- non-U.S. GAAP financial measures. Forward-looking statements do not guarantee future performance, and involve risk and uncertainties. Next slide, please. With 50 years of operating history, Archer has grown to a global company with $1.3 billion of revenue and about 4,500 employees, split into 4 business areas: Well Services, Customer Operations, Land Drilling and Renewables. First, I want to comment on our growth in reported EBITDA since 2022. Midpoint guidance for 2025 implies an annual growth of 21% realized through organic growth as well as accretive M&As. Importantly, we see the growth in cash contribution following our growth in EBITDA, and we are pleased to see an almost doubling in cash contribution over the same period. This growth is what has enabled us to refinance our debt to lower interest costs and introduce a shareholder return program. I will not spend much time on our business years in coal, but I want to highlight that Well Services and operations represent about 3/4 of our activity. While most of the activity in the North Sea, we continue to expand and grow internationally into new areas and new service lines. Archer Land Drilling is one of our major drilling and it's one of the major drilling and workover companies in Argentina, where we compete with the likes of H&P and neighbors. Although the land drilling business represents nearly 25% of our revenue, it only contributes low double digits over the -- on the cash -- of the cash contribution. So the current volatility does not have significant impact on Archer's overall cash flow generation. Last year, we formalized Renewable services as a separate business area. We mainly provide geothermal drilling services and wind services with a total business volume about $100 million in 2025. Next slide, please. This slide summarizes our shareholder return program. We initiated our shareholder return program in Q2 with a distribution of $5.5 million or NOK 0.63 per share. We are pleased to confirm that the same amount will be distributed again in Q3 corresponding to NOK 0.62 per share. The payment date is set to 26th of August. We do plan to maintain a quarterly distribution, and our target is to increase cash contribution over time in line with earnings growth. This reflects both the strength of our cash generation and our commitment to delivering competitive and sustainable returns to shareholders. At the current share price, this level of direct distribution represents a yield of around 11%, which you can see here on the right in comparison with industry peers, such as SLB, Weatherford and Halliburton. As chart shows, our return is well above industry peers. Archer shares should be an attractive share to hold for our shareholders. Slide 5, please. In Q2, we delivered growth and strong results. Revenue came in at $348.9 million, up 13% year-over-year, while EBITDA reached $38 million, an increase of 16%, while adjusted EBITDA grew 30% year-over-year to $41.7 million. Operationally, we continue to execute well, and we secured key contracts that give this ability for the future. In July, we acquired well connection, bringing drill pipe inspection and repair in-house. I'll come back to this acquisition later in the presentation. Lastly, as already mentioned, the Board has approved our second quarter cash distribution of $5.5 million. Next slide, please. This slide highlights the key strength of our business: Our resilient EBITDA performance over time. You can see here our historic EBITDA from 2017 to our guided '25 estimate. It shows a steady upward trend with moderate dips following major disruptions like COVID in 2020 and '21. I think the message is clear. Our EBITDA is fairly stable and growing even in under volatile market conditions. And you can ask why is that? It really comes down to our business model and business exposure. It is built and designed to create a robust and more predictable business outlook. We are largely exposed to brownfield operations, which are less sensitive to swings in commodity prices. This large exposure to brownfield and well makes Archer somewhat unique in the industry. Brownfield operations are in mature fields that have been developed, where infrastructure is in place and the fields are producing. These OpEx driven services form the backbone of our clients' activity, securing their cash flow through low cost per barrel production and providing us with a stable and predictable demand for our services. Brownfield production is what funds dividends, share buybacks and investment in the greenfield. Archer had limited finance exposure to the more volatile greenfield services, such as seismic exploration drilling and construction of new production facilities. This makes our performance more predictable and less cyclical than many of our peers. The comparison on the right-hand graph backs up my point on resilient and lower cyclicality. In Q2, Archer's EBITDA grew 16% year-over-year, while the 5 major oil service companies declined 13%. For the first half of the year, we see the same. Our EBITDA grew by 12% year-over-year, while the oil service majors saw a corresponding decline. The major well service companies are, to a larger extent, exposed to exploration and all construction segments with more often are more linked to oil price and uncertainty. Slide 7, please. Turning to our 2025 business outlook. I want to be clear that there are no changes to our cash distribution commitment. Starting with land drilling. The oil companies in Argentina are prioritizing capital allocation towards oil and gas export infrastructure in Vaca Muerta and have temporarily slowed down drilling and completion activity. Compared to prior guidance for 2025, we expect land drilling revenue to be down about 100 million and EBITDA to be lowered by 10 million to 12 million. Nevertheless, we expect a net impact on cash flow to be slightly positive as we reduce maintenance CapEx, improved working capital and sell excess equipment. Going forward, we expect activity level in the south remain muted expecting activity in Vaca Muerta to rebound in 2026. Outside of land drilling, the business is largely in line with prior guidance with some slowdown in the U.S. and delays of certain projects in the U.K. We have also increased our investment in lighter P&A unit to respond to market demand. In 2025, we invest more than we owned in EBITDA but we will benefit from these investments over the coming years. Also, in addition, we have improved our long-term visibility to award a multiyear FP&A contracts in both Equinor in Norway and Repsol in the U.K. So overall, while there are shifts within the business, our capacity to maintain shareholder cash distribution remains intact. Turning to Slide 8. Our financial guidance reflects both the strength of our core operations and the strategic actions we have taken to position Archer for long-term value creation. Our established guidance does not affect our cash distribution commitment. Despite some recent shift activity, particularly in Argentina, we remain confident in our ability to deliver solid financial performance. Our diversified portfolio improved capital structure and exposure to the growing P&A market support continued resilience and cash generation. This slide outlines our results expectation for revenue, EBITDA and cash flow for the remaining of the year based on current visibility, contract development and market outlook. Revenue is set to increase by low single digits as growth in core segments are offset by the reduction in land drilling, as outlined in the previous slide. Our EBITDA is expected to increase by 8% to 15% from 2024. We have incurred restructuring costs as we adjust cost levels to new activity. And we want to emphasize that our guidance for adjusted EBITDA is in line with our previous EBITDA guidance. We continue to anticipate capital expenditures to be around 4% of revenue in 2025 as we commit to the P&A market through investments in land drilling units suited for growth in the P&A market. We expect second half of 2025 to be stronger in the first half due to commencement of project and seasonal activity. Finally, we see our leverage ratio to be between 2 and 2.5 towards the end of the year while our target remains to reach a leverage ratio of 1.5 to 2x over time. Moving to Slide 9. I want to highlight the recent investment in a new technology company for subsea P&A solutions. The service P&A market is expected to grow meaningfully over the coming years, and Archer wants to be a leading service and technology provider in this market. Without going into too much detail, we sold our developing an innovation innovative electrochemical technology that enables removal of tubing casing with wireline. Potentially, we're moving the need for a rig to perform a operation. This will significantly reduce the cost of subsea plug abandonment operations. Our clients are very interested in this new technology, and it helps us position for upcoming subsea projects. This investment position us to become a leading service provider in the growing subsea market, a natural extension of our already successful top PNA capabilities. Moving to Slide 10. We are pleased with our growth in the P&A market, and we remain confident in our outlook for our services. The market well P&A and decommissioning has grown over the last few years and is expected to grow materially in the next years and decades. Through organic growth and acquisitions, Archer has developed one of the broadest service offering in the industry. In continuation of our commitment to expand our business, we are currently investing in 3 life and plug and abandonment units to drive global growth and capture market. Total investments for these 3 units is below $30 million in total. These new 3 units are currently being prepared for operation in 2025 and 2026, giving us access to attractive new opportunities starting with the North Sea, the U.K. and the Gulf of Mexico. By delivering this slightly more efficient units to our clients, we are not only unlocking new market segments, but also creating entirely new 2 business lines, supplemental or complemental to our more capable but also more costly model drilling rigs. In terms of deployment, the series unit will enter services on Equinor Staffer A platform in August 2025. The compact will operate will start working for Repsol on the Fulmar and Scapa fields in Q2 2026 under a new 5-year contract, replacing Emerald. The last unit is committed to commencing operations in Gulf of America in Q2 2026. This -- enables us for our growth strategy, expanding our geographical reach, broadening our service offering and positioning Archer for long-term growth in the global P&A market. Next slide, please. We have strengthened and expanded our service offering in Norway with the recent acquisition of Well Connection. Well Connection have, for some years, delivered these services to Archer, and we know them well. This move allows us to bring inspection, maintenance and repair services for drill pipe and related equipment in-house, increasing our service offering to more of our existing customers. This represents a relatively modest investment, and we do focus a fairly rapid payback of less than 2 years. With that, I hand the word over to Espen.

Thank you, Dag. Operational revenue in platform operation increased by 14% in the quarter, ending at $119 million, while total revenue increased by 21% to $158 million. EBITDA came in at $18.5 million, a 55% increase compared to previous quarter, and 25% above the result in the second quarter 2024. The improved EBITDA reflects strong contribution from all service lines and exceptionally strong contribution from our 2 modular rigs in the quarter. The acquired company, Well Connection, as already mentioned, will be integrated with our rental business in platform operation and will deliver inspection, repair and maintenance of drill pipe to the Norwegian market. We are pleased with the successful completion of the 3 air P&A campaign for Taca in the U.K., ahead of original schedule. Moving to Slide 13. For the quarter, our Well Services division delivered revenue of $83.5 million. That is 18% higher than the same quarter last year, showing solid year-on-year growth. Compared to previous quarter, revenue is slightly lower. This is mainly due to a reduction in reimbursable revenue, not underlying activity levels. EBITDA came in at $15.1 million, which is 35% increase compared to same period last year and 22% higher than the previous quarter. The main drivers here are the product sales mix and higher activity in Norway, which contributed positively to our overall performance. The high activity in Norway across all service lines are reinforcing our strong position in that market. In the U.S. and U.K., we saw slightly softer activity in line with the market and our competitors. During the quarter, we mobilized our innovative conveyance tool contract for operations in Norway. Slide 14, please. In the quarter, revenue was $73 million for our land drilling operations, reflecting reduced activity in the south of Argentina. EBITDA came in at $2.9 million, impacted by the costs associated with downsizing of operation in the south. Adjusted EBITDA was $6.3 million, down from $8.4 million last year, driven by the mentioned lower drilling activity in the South. Overall service activity in Argentina is down 26% compared to year-end 2024. We expect drilling activity to remain flat through 2025 with an increase anticipated in 2026. During the quarter, we completed the down-manning of approximately 450 employees, in line with reduced drilling requirements in the South for Pan American. On a positive note, Pan American renewed their contract in the South for 9 pooling units and 8 work units, which helped secure a base level of activity in that region going forward. Next slide, please. The Renewables segment delivered revenue of $33.9 million this quarter, up from $22.5 million in the previous quarter, a strong sequential improvement. EBITDA was $3 million, also up from $2.5 million last quarter, reflecting particularly higher activity levels for our geothermal operation. We saw high activity and strong utilization of the rigs in the geothermal segment, supporting the positive financial performance. Vertical experience -- Vertical experienced high seasonal activity in wind services with operations running at full capacity. In offshore wind, the fabrication of the floating substructure for Total is now complete, and shipment to the assembly yard in Norway is underway, marking a key milestone for this project. The project has experienced some delays, and the plan is to tow it out to the field in second quarter 2026. Moving to Slide 16. In Q2, we delivered total revenue of $348.9 million, an increase of $39.9 million compared to the same quarter last year. This growth came from all business areas, except Land Drilling. EBITDA before exceptional items was $41.7 million with a margin of 11.9%, up from 10.4% last year, which showcases continued operational efficiency. We recorded exceptional items of $3.7 million in the quarter, primarily linked to down manning in Argentina. After these exceptional items, reported EBITDA was $38 million, up $5.2 million or 15% year-on-year. EBIT came in at $22.1 million. Loss on sale of operation in Argentina of $8.7 million relates to previous mentioned restructuring in the South and sale of business including 2 drilling rigs sold to Pan American. Net profit was $1.4 million, and adjusted net income was $12.8 million, reflecting underlying strengthening of business despite restructuring impact. Next slide, please. At the end of Q2 2025, we held cash and cash equivalents of $45.9 million, which is a decrease of $13.9 million compared to year-end 2024. This reflects ongoing investments, reduced drawing under our flexible credit facilities and operational cash flows during the first half of the year as well as the refinancing in Q1. Our available liquidity exceeds $95 million, ensuring we have strong financial flexibility to support our operations and growth initiatives. Net reported interest-bearing debt of $435 million reflects current leverage position after accounting for cash balances. The noncontrolling interest on the balance sheet primarily relates to Archer's 60% ownership in Iceland Drilling and 65% ownership in vertical services. Our total equity ended at $192.7 million. Next slide, please. To sum it up, we are Archer, we are a well company focused on drilling and well services. Our foundation remains strong, around 90% of revenues come from our relatively stable recurring brownfield operations and P&A. This consistency supports predictability in earnings even through market shifts. We demonstrated solid EBITDA performance across cycles. Our operational focus and cost discipline enabled us to sustain profitability in both upturns and downturns. The recent $425 million bond refinancing has significantly improved our capital structure. We now have a more robust and simplified balance sheet with longer maturity and better terms. With our improved financial flexibility, we have initiated a return to shareholders. In Q2, we distributed $5.5 million in cash to our shareholders, and we'll do the same this quarter and in quarters to come, representing a yield of approximately 11% at current valuation. Last, the outlook is positive, particularly with the expansion of global P&A market, as we anticipate an 8% to 15% increase in our EBITDA this year, backed by our solid backlog and contracts in the pipeline. With that, I will hand the call over to the operator for any questions. Thank you, Elliot. Will you please open the line for questions?

[Operator Instructions] We have no registered questions. So I'll now hand back to Espen Joranger for any final remarks.

Thank you. 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 good day.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.