Archer Limited

Welcome to the first quarter 2020's results, conference call for Archer. For the first part of this call, all participants are in a listen-only mode. Afterwards, we will have a question and answer session. To ask a question, please press five star on your telephone keypad. I will now hand the word over to Doug Skinlow, CEO, and Esben Yolanda, CFO. Please begin.

Thank you, Shell. Good morning, ladies and gentlemen, and thank you for joining us for Archer's first quarter 2020 trading update conference call. The call is hosted jointly from Oslo and Stavanger, and I am on the call together with Espen Johanger, our recently appointed chief financial officer. In today's call, I will touch upon the key highlights before handing the call over to Espen, who will summarize Archer's Q1 financial results, before I again will walk you through the operational update. Esten will, towards the end of the call, provide an updated outlook for 2020. Moving to slide two. I would like to note that information provided in today's call includes forward-looking statements as well as known gap financial measures. Next slide, please. First quarter 2020 was an extraordinary quarter. Archer delivered strong operational performance and results for Q1, despite the ongoing COVID-19 pandemic and sharp drop in global oil prices. We increased our underlying EBITDA to $28.1 million compared to $25.9 million in the corresponding quarter in 2019. We are very pleased to have concluded on our refinancing of our main facilities over the last few months. The agreements were closed end of April. The refinancing gives us time to focus on our operation and cash preservation and provide sufficient liquidity towards 2023. We will revert to this topic later in the presentation. We are also extremely happy that both our modular rigs have been contracted and are currently mobilizing for a scheduled work in New Zealand and North Sea respectively. We will from third quarter see the full financial impact of having these rigs back to work. We saw a reduction in activity towards the end of March in most of our business areas, following the spread of the COVID-19 virus and the oil price drop. ARCHA has since the virus emerged monitored the situation closely to ensure the safety of our colleagues, customers and the communities in which we operate, while continuously delivering efficient operations to our customers. In order to mitigate the impact of reduced activity, we have effectuated a series of cost reduction initiatives, which includes reduction in force and cancellation of investments. We will provide further details about the impact and our response later in the call. I will now hand the words over to Espen, who will take us through the financial summary.

Moving to slide four, operating revenue in the quarter amounted to $237.1 million, an increase of 11.4 million, or 5%, relative to the corresponding quarter last year. The growth in revenue came in eastern hemisphere with particular strong growth in platform drilling, engineering and oil tools. This was moderately offset by reduced revenue in land drilling as we have fewer rigs operating. EBITDA before exceptional items ended at 28.1 million dollars or 11.9% of revenue. Compared to Q1 2019, the increase is 2.2 million or 8.6%. Our engineering and oil tools division contributed most to the growth in EBITDA before exceptional items. as well as our operation in the south of Argentina. With a total of $6.4 million in exceptional items incurred in the quarter, reported EBITDA was $21.7 million. The substantial amount of exceptional items are primarily incurred in our platform drilling division and is associated with redundancy costs following reduced activity in our platform drilling operation in the UK. Our reported net interest-bearing debt came in at $588.3 million at the end of Q1. In the refinancing executed post Q1, our NID was reduced by debt forgiveness in the magnitude of $45 million. We thus present a pro forma NID incorporating this effect, showing that the NID would be $5444 million. At the end of Q1 we have a total of 121 million dollars in available liquidity, cash and committed credit lines at our disposal. We believe that this is more than we actually need going forward in most scenarios and agreed with our banks to reduce the committed credit lines by 31.7 million dollars as well as to make an installment of 10 million euro on our Hermes facility when executing the refinancing. The Proforma liquidity of 91 million dollars is taken into consideration the reduction in our credit facility through the refinancing. we are comfortable that the remaining $91 million in liquidity is sufficient for us going forward. Next slide, please. On slide five, we have brought the development in some of our key matrix over the last five quarters. The gross development in our USD reported revenue is supporting the underlying increased activity in Archer in the period. However, the USD has strengthened compared to NOC, Argentina pesos and the British pound in which we incur a substantial amount of revenue in. So the graph somewhat understates the increased activity we have seen. The development in EBITDA before exceptional items is also strong over the period. As mentioned, several of our business units have contributed to the growth over time in EBITDA. In particular, oil tools, engineering and land drilling in the south of Argentina have improved their results. Our platform drilling operations remain strong despite somewhat lower EBITDA contribution in current quarter. Wireline continue to underperform and we have also seen reduction in rig operation in land drilling in the north of Argentina. We spent a total of $6.7 million in CAPEX in the quarter, which is substantially lower than Q3 and Q4 in 2019, where we had large investment programs in relation to rig upgrades for contracts in our land drilling operation. In Q1, most of the CAPEX was spent in Eastern Hemisphere, in particular for mobilization of modular rigs, additional plugs for oil tubes, and recertification and overhauls required for our platform drilling contracts. Following the outbreak of COVID-19, we have reviewed our CAPEX program for the future and have postponed or canceled non-critical CAPEX. We maintain a strong focus on development of our net interest-bearing debt. The quarter ended with a mid of $588.3 million, which was a modest increase compared to end of Q4 2019. The debt forgiveness from Seedrill relating to our refinancing will reduce our debt by $45 million. Taking into consideration the debt forgiveness, we would end the quarter with a pro forma need of $544 million. I will now hand the word over to Dag.

Thank you, Espen. Towards the end of Q1 and into Q2, we saw the effect of the COVID-19 virus and the oil price drop and how this immediately impacted our clients, their operation, and the demand for our services. The outcome of the outbreak and the future of our price remains uncertain. Our primary objective has been to ensure the safety of our colleagues, customers, and the communities in which we operate by delivering efficient operations to our customers. Our offshore clients have indicated a substantial reduced activity going forward. We announced investment cuts in the range of 50 to 30% compared to their earlier plans. Specifically, in the North Sea, the drilling and intervention operations are being meaningfully reduced as operators are adjusting drilling plans for the new outlook. In Argentina, governmental lockdown has reduced our operation with around 75 percent in brazil the operation on peregrinophil has been put on standby due to the lockdown and the mobilization of emerald offshore in new zealand is delayed by three months given the uncertainty in the intermediate future and to mitigate the impact of reduced activity we have effectuated a series of cost reduction initiatives, which includes reduction in workforce and cancellation and postponement of investments. More specifically, we have implemented cost savings estimated to more than $40 million on an annualized basis, which includes termination of more than 300 employees and consultants, as well as more than 200 temporary layoffs in the eastern hemisphere. In the western hemisphere, We have been able to reduce the monthly cost by approximately $7 million as 1,500 people are staying at home after the lockdown in Argentina. At the current stage of the COVID-19, we expect a total reduction in our workforce of 12 to 15% towards the mid-year compared to end 2019. We hope that the reduction will be lower, but we will do the necessary steps in order to bring our costs down along with reduced activity. Our target is to reduce our total operation expenses in line with the reduction in our revenue for the year. The uncertainty about the future, combined with our focus on preserving our liquidity, has led us to review our CAPEX program going forward. Non-critical CAPEX is delayed and canceled, and we expect to be able to reduce our investment by 40% to 50% compared to our 2019. level. Next slide, please. Moving to slide seven. Platform drilling and engineering revenue increased by close to $200,000 relative to the fourth quarter, and increased $18.1 million relative to the same quarter in 2019, ending at $123.6 million. This represents an increase in revenue in excess of 15% compared to Q1 2019. Ebitda for the platform drilling and engineering business has been stable and solid at the high level. And Ebitda before exceptional items was at the same level as the preceding quarters. We incurred exceptional cost in the quarter related to a provision for redundancy for more than 200 employees in the UK. The cost includes redundancy cost and cost in notice curve as relevant. We see reduced activity towards the end of the quarter compared to the beginning, and we expect this development to continue into Q2 as clients reduce their activity. Capex spent roughly $2 million in the quarter, primarily in relation to the mobilization and reactivation of the modular rigs, as well as overhaul and certification Capex in our platform drilling operations. Finally, our engineering division grew in Q1 and maintains a backlog with recent project awards in both UK and Norway. Next slide, please. Following the lower oil price, our clients have initiated a substantial reduction in their drilling programs in the magnitude of 35%. This reduces the work scope under our platform drilling contracts, and we need to reduce our crew accordingly. We will typically be notified in advance of activity level adjustments so that we can adjust our workforce accordingly in a controlled manner. As the graph illustrates, the activity in Q1 was in line with Q4 2019, but we forecast a substantial reduction in active drilling rigs in Q2 compared to Q1 as explained. Furthermore, our platform drilling contract with ConocoPhillips will expire at the end of June, reducing the number of rigs we have in our contract portfolio by three weeks. Emerald is currently in New Zealand, waiting for shipment of the rest of the rigs to the offshore platform, currently delayed by three months following the COVID-19 outbreak. Topaz is on schedule and is being uprigged on Heimdall as per plan. We expect the Topaz to commence operation in June. At the end of Q4, we announced that we had received a letter of intent for a multi-year operation for Topaz. The scope of the possible contract is a firm period of two years and three months, with an additional option period of seven months. We are currently finalizing the front-end engineering study for the deployment of Topaz on the climate platform in the North Sea. Despite the delay of the award of the contract, we expect the contract to be awarded during May, and operation would commence in mid-2021. Next slide, please. Well services delivered a strong 15% increase in revenue compared to first quarter in 2019, ending at $34.3 million. Debit-to-air margin exceeded 20% of revenue, and EBITDA ended at a very solid $7 million, mainly driven by our Oil Tools Division. Given the increase in demand for our oil tools, we spent an additional $2 million in the quarter supporting the underlying activity. Oil tools have so far only seen a moderate impact due to COVID-19 and a drop in oil price. Violine had low activity in the first quarter, but as client activity in the North Sea is slowing down, we have implemented cost cuts and right-sizing of our business in order to preserve margin. We have reduced our workforce with 50 full-time employees, and we need to go to the further cost reduction if the activity level is reduced further going forward. Slide 10. Our revenue for land drilling was moderately double compared to Q4 2019, but down almost 15% relative. There was something mistake here. Let's see. Something wrong here on my side, so I'll shortly continue. Okay. Q1 2019. As you can see from the bottom left graph, active drilling rigs dropped by one during the quarter, and active drilling rigs are down by six rigs compared to Q1 2019. Despite reduced revenue and activity, the EBITDA before exceptional items developed steadily, and the quarter was at the level of the previous quarter. We incurred $2.1 million in exceptional charges in the quarter related to the COVID-19 standby situation, as well as further termination costs in Argentina and Bolivia. From March 20th, Argentina locked down its society in order to prevent the spread of the pandemic. This had an instant effect on our drilling operation in the country, as our employees were instructed to stay at home. Our negotiations with our clients on compensation during the lockdown are continuing. We keep our pulling units operations during the lockdown. In addition to the COVID-19 pandemic, Argentina is challenged by the need to refinance a substantial amount of foreign debt, and the political and economic uncertainty remains high. We did receive notification of termination of two of our drilling rigs in Vaca Merta, which stopped working in February. Capex ended at $1.4 million in the quarter compared to $9.1 million in the previous quarter, as the upgrade of three of our rigs in preparation for the new contract for YPF in the Vaca Merta was finalized. With each rig upgrade, Archer's position as the leader in drilling services for the unconventional market in Argentina is secured. Next slide, please. On May 4th, Quintana Energy Services, or QS, announced its plan to merge its operation with another US-based oil and gas service company, Kelex Energy Services. We believe this is a good and strategic fit for both parties, and will create a value for Archer as shareholders, as our ownership stake in QS will give us roughly 11.5% of the shares in the combined company. The main drivers for the transaction, as we see, is that Cries and Kelex provides complementary services. We believe the management will be able to deliver annual cost synergies in excess of $40 million within 12 months and the consolidation of the two companies. The combined company will have significant liquidity available with maturity of debt in 2025. Arche will continue to have board representation, as I will also be a director in the new combined company. Given the approval by both company shareholders, we expect the merger to close within four months from now. And then I hand the words over to Espen again.

Thank you, Dag. During April, we closed our refinancing at Communicated in March. We are extremely pleased that we have been able to secure this refinancing. In brief, the refinancing extends the maturity of our main facility until October 2023, with moderate installments totaling roughly $5.5 million, which commence in Q1 2021. With this refinancing in place, we have managed to preserve our interest rate margin, avoiding any need for additional funding of the company, and most importantly, securing an adequate level of liquidity for the period ahead of us. As you can see in the graph up to the right, we will reduce our available liquidity from $144 million at the end of Q4 2019 to a pro forma available liquidity of some $91 million driven primarily of repayment of $31.7 million on our RCF and Euro 10 million on our Hermes loan facility as part of the refinancing. We are confident that the $91 million remaining available liquidity is sufficient to withstand a deeper downturn, as well as enable us to fund growth when the markets turn. Next slide, please. Slide 13, summary and outlook. Q1 2020 was a solid quarter for Archer with strong operational performance. Going into Q2 and beyond, we look forward to the commencement of the operation of our modular rig. We are very satisfied that our clients have again put faith in our capacity and ability to provide safe and efficient operations on Heimdal and Maui platforms. The rigs have been idle for a long time, but the regained interest in the concept makes us confident that we will see more activity going forward. With the refinancing in place and liquidity available, we can focus on efficient operation and to rapidly adjust our cost level and investment to the changes in the market conditions. We expect to continue to be cash positive in the remainder of 2020 and should thus see an increase in our liquidity reserve going forward. Given the macroeconomic environment, we reiterate that there remains significant uncertainty in our forecasts for both the remainder of 2020 and beyond. As we see it today, we expect revenue in 2020 to be around 20 to 25% below 2019. The second quarter is expected to be the weakest quarter in the year with lockdown in Argentina and the two modular rigs meaningfully contributing from Q3. With some help from lower interest rates and intense focus on cost adjusting, rightsizing and CAPEX discipline, We will be cash flow positive in 2020 and we estimate our need to be in the range between $525 and $535 million at year end. With that, I will hand the call over to the operator for any questions. Thank you, Keith. Will you please open the line for questions?

Yes. If you have a question for the speakers, please press five star on your telephone keypad. If your question has already been answered, you can remove yourself from the queue by pressing five star again. We will just have a brief pause while questions are being registered. And just as a reminder, if you have a question for the speakers, please press five star on your telephone keypad now. And as there are no questions from the conference call, I will hand it back to the speakers for your closing 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.