Archer Ltd

OSE:ARCH

Earnings Call Transcript

[Operator]

Welcome to the Archer First Quarter 2022 Earnings Release Call. [Operator Instructions] Today, I'm pleased to present Dag Skindlo, CEO; and Espen Joranger, CFO. Please go ahead with your meeting. Dag.

[Dag Skindlo, executive]

Thank you, Aaron. Good morning, ladies and gentlemen, and thank you for joining this conference call for the first quarter 2022. 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 operations for the first quarter. Espen will thereafter walk us through the financial section and the 2022 outlook. 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. Forward-looking statements do not guarantee future performance and involve risks and uncertainties. Actual results may differ materially from projection as a result of certain risks and uncertainties. Further information about these risks and uncertainties are set forth in our most recent annual report for the year ending December 31, 2021.

Next slide, please. Revenue in the quarter of $219.1 million is a decrease relative to the fourth quarter. Compared to Q1 2021, revenue increased by $6 million. The reduction in revenue compared to Q4 is primarily driven by a reduction in our reimbursable revenue compared to the previous quarter, as both our Well Services and Platform Drilling division had a reduction in activity compared to the higher activity in Q4 last year.

On the back of reduced activity and revenue, our adjusted EBITDA came in at $21.1 million, in line with our own expectations. The reduction compared to the previous quarter was primarily driven by a reduced contribution from the Well Services and Platform Drilling, following reduced activity and revenue. Excluding the costs for acquisitions, the need was flat in the quarter. Furthermore, excluding acquisitions, our net interest-bearing debt is down $19 million year-over-year, demonstrating that we deliver on our commitment to be cash positive.

We are pleased to report a net profit for the quarter of $13.9 million, which corresponds to $0.09 per share. Espen will shed some further light on the balance sheet and the P&L towards the end of the call. Slide 4, please.

So far this year, we have secured substantial backlog through contract extensions by Equinor and Pan American Energy for oil tubes, Platform Drilling and Land Drilling divisions. The contract extension from Pan American covers 4 drilling rigs, 13 worker units and 13 pulling units. The extended contract secures 2 additional years of operation.

Pan American has the flexibility to adjust the level of activity up and down during the contract terms, but based on our current activity outlook, the total revenue of the contract extension is estimated at $275 million. Improved terms of the remaining contracts should provide a basis for us to lift the margins in our Argentinian operation.

During Q1, Equinor exercised its extension option for the Platform Drilling contract currently held in Norway for 12 of their platforms for an additional 2 years. This secures an estimated $565 million in additional backlog for Archer. As we have noted this morning, our Well Services division was awarded a 2-year contract extension of the air frame agreement with Equinor, which covers plugs and abandonment services, fishing and downhole mechanical isolation equipment.

Given the current activity level, we anticipate that the extension would add roughly $60 million in additional backlog. The total backlog secured through these 3 extensions add up to roughly $900 million. We believe these awards are achieved on the back of our customer focus, dedication to safety, efficient and cost-effective operations as well as the commitment to our own and our customers' ESG road map. The substantial additional backlog gives us good visibility on revenue and activity in the next 2 to 3 years.

Slide 5, please. During the first quarter, we acquired Ziebel AS for a bit more than $1 million on a debt and cash-free basis. Ziebel is a technology company focused on providing high-value fiber optic measurements and innovative conveyance to improve reservoir recovery and performance. In their distributed fiber optic technology, Ziebel uses distributed acoustic sensing and distributed temperature sensing in an integrated manner to provide easily understandable auto products for our customers.

And the core of their technology is the composite carbon road, which deploys the fiber optics strands securely into the wellbore. The Ziebel Technology is comparable and complements the unique carbon rolled conveyance provided through Archer's contract technology and is therefore, strategic good fit for us.

Slide 6, please. Following several quarters with strong increased activity, this quarter was lower compared to the preceding quarters. Revenue in the quarter decreased by $11.7 million, which also led to a reduction in our EBITDA. Reduction of par substantially when compared to Q4, but we need to remind ourselves that Q4 was exceptionally strong for both Oiltools and Wireline.

We further note that the first quarter is traditionally slow in Wireline and Oiltools due to weather conditions in the North Sea and a shorter-than-normal quarter. We also know several planned jobs in Norway, U.K. and Africa being postponed to second half of the year. On the back of reduced activity, we are disappointed with a reduction in EBITDA quarter-on-quarter. We incurred $800,000 in exceptional charges primarily related to the use of overtime, which was required to cover COVID-19-related sick leaves for offshore cruise. We do not anticipate similar costs going forward.

Finally, the EBITDA was hampered by costs associated with cross training of our personnel, which will benefit from later this year. On the operations side, we highlight the nomination of world contract unit in the Middle East, where we are preparing for operations in the second quarter. In addition to the Equinor contract extension, Oiltools secured a frame agreement with OKEA in Norway and with [indiscernible] and [indiscernible] and [indiscernible] in Australia.

Moving to Slide 7. Revenue from Platform Drilling, Engineering and our older rigs reduced by $21 million compared to the previous quarter, of which $16.4 million is related to reduced reimbursement revenue. We're adjusting for the reduction in reimbursement revenue, which has no margin. Production revenue over the quarter was $4.5 million, mainly reflecting a shorter quarter. Following reduced activity, combined with less performance bonus, adjusted EBITDA came down to $10.9 million in the quarter. reduction compared to fourth quarter of $1 million.

During February and early March, we incurred substantial additional costs related to overtime to COVID-19-related sick leave offshore, which we cannot recover from our clients. Extraordinary overtime amounted to $1.6 million in the quarter.

On the operations side, we are pleased that our customer OMV has added additional work scope for Emerald in New Zealand and requested an additional well to be drilled while the modular rig is in New Zealand. This additional revenue will benefit the second half of 2022.

Slide 8, please. Our revenue for land is stable at $58 million in the first quarter, while the adjusted EBITDA came in at $5.7 million. We incurred a total of $2.5 million of exceptional charges in the quarter resulting in an EBITDA of $3.2 million. The exceptional charges related to severance payment, cost of personnel and COVID-19-related disruption to operations due to sick leave.

During the quarter, the Argentine government reached an agreement with IMF of their debt and on the back of that, approved the construction of a necessary gas pipeline that will transport gas from Neuquén to Buenos Aires. This should lead to increased drilling activity as the transportation of gas has been a bottleneck for years. With that, I hand over the words to Espen, who will take us through the financials in greater detail.

[Espen Joranger, executive]

Thank you, Doug. Looking at Slide 9, we see that our total revenue for the first quarter amounted to $219.1 million compared to $213.4 million last year, an increase of $5.7 million. When netting off the reimbursable revenue, we see that the operating revenue increased by $1.7 million compared to first quarter 2021.

For the quarter, the adjusted EBITDA was $21.1 million, $0.4 million lower than the corresponding quarter in 2021. As Dan has mentioned in the previous slides, we incurred exceptional charges for the quarter, amounting to $4.9 million. This was considerably higher than anticipated. The majority of these costs are related to COVID-19, in particular to the use of overtime to compensate for the offshore sick leave. We experienced around 10% sick leaves for our offshore crews in the North Sea during the quarter, leading to more than $3 million of additional overtime costs in the quarter to replace offshore employees on sick leave.

In the first quarter of 2022, we recognized impairment charges of $5 million for the Argentine rigs that have been idled more than 5 years. In relation to our acquisition of Ziebel, we recorded a preliminary gain on a margin purchase amounting to $9.2 million. In our other financial items, we include the mark-to-market value adjustment of our interest rate caps. Following the substantial increase in forward rates, the value of our interest rate caps increased by some $13 million in the quarter.

We are pleased to report a net profit of $13.9 million in the quarter, largely driven by the mark-to-market adjustment of our interest rate caps and the gain on the Ziebel acquisition offset by the impairments, as mentioned above.

Slide 10, please. Total assets increased by $52.3 million in the quarter mainly explained by the increase in cash from the drawdown of our loan facility during the quarter. On the liability side, the biggest difference is the reduction in accounts payable of $7.4 million since the last quarter. Net interest-bearing debt came out at $508 million, which is a modest decrease compared to year-end and largely explained by the final installments relating to the Ziebel acquisition as well as settlement for the Ziebel acquisition, which totaled roughly $7 million.

The increase in equity is a result of the profit for the quarter as well as the foreign exchange effect on goodwill. The book value of our equity is $103.3 million at the end of March. We continue to preserve our liquidity and have in excess of $106 million in available liquidity, which includes undrawn and committed credit lines.

Slide 11, please. To sum up, our first quarter was a quarter with high exceptional costs, primarily as a consequence of operational challenges related to sick leave, arising from the last wave of COVID cases. We do not anticipate that these costs will be reoccurring in the next quarter in this magnitude. These additional costs will have an impact on the reported EBITDA for 2022 as a whole and primarily bridge this difference between the guided EBITDA communicated in our trading update earlier this year and the revised guidance we present today.

2022 is turning out to be a transition year for Archer where our main clients in the North Sea are drilling fewer wells due to maintenance of platforms, and our clients in Argentina are holding back drilling activity, pending the agreement with the IMF and the construction recently approved gas pipeline from Vaca Muerta to Buenos Aires. The Russian innovation of Ukraine has been a wake-up call for the energy security within our core markets.

This, in combination with underinvestment in new oil and gas developments, puts pressure on oil and gas prices, which incentivize investments going forward. Looking beyond 2022, we remain optimistic on the market fundamentals for Archer's activity and operations. As we see it today, we now expect both revenue and EBITDA to be moderately higher in 2022 than in 2021. We revised down our CapEx guidance from 3% to 4% of revenue to roughly 3% of our revenue and continue to expect that we will generate positive cash and reduce our NIP year-over-year.

Looking into 2023, we believe the activity of Archer's operations will expand. We believe that operators plans for increased drilling in the North Sea, the positive development in Argentina as well as general increase in oil and gas activity will positively impact Archer's revenue and EBITDA into 2023.

With that, I will hand the call over to the operator for any questions. Thank you. Aaron, will you please open the line for questions?

[Operator]

[Operator Instructions] There are no questions. Thank you.

[Dag Skindlo, executive]

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.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your line.