Archer Limited

Welcome to the Archer second quarter 2020 earnings release. Throughout the call all participants will be in listen only mode and afterwards there'll be a question and answer session. I'll now hand the floor to Doug Stintler, CEO. Please begin your meeting.

Thank you Mark. Good morning ladies and gentlemen and thank you for joining us for Archer's second quarter 2020 conference call. The call is being hosted jointly from Oslo and Stavanger, and I am on the call together with Archer's Chief Financial Officer, Espen Johange. In today's call, I will touch upon the key highlights and summarize Archer's operations for the second quarter before handling the call over to Espen, who will walk us through some of the financial metrics and provide you with an updated outlook for 2020. Towards the end of the call, we will open the line for questions. Moving to slide two, I would like to note that the information provided in today's call include forward-looking statements as well as non-GAAP financial measures. Next slide, please. When we entered the second quarter, the world was very uncertain, and the oil price was hovering just above 20 US dollars a barrel. Archer's activity has certainly been affected by both the pandemic and the depressed oil price. But we are very happy that we have managed to deliver on our operations and report an EBITDA before exceptional items of 25.4 million dollars in the quarter. The exceptional items recorded related to COVID-19 amounted to 6.3 million in the quarter. We do expect second half of 2020 to have a lower run rate than first half, but our overall outlook for 2020 has improved compared to what we communicated in relation to our first quarter trading update. During the quarter, we finalized the documentation of our refinancing. Through the refinancing, we extended the maturity on our main loan facility while securing Archer's liquidity position. The combination of cash generation from operations absence of major low maturities and ample available liquidity enables ARCA to withstand a meaningful reduction in activity over time. At the end of second quarter, we had a total of $118 million available liquidity. The $118 million is after we have reduced our committed credit lines by $31.7 million on our revolving credit facility, as well as paying an installment of 10 million euros on our homeless facility. As communicated in our first quarter conference call, we received gross debt forgiveness of $45 million from CEDRIL in exchange for a reduced conversion price. Debt forgiveness combined with a positive free cash flow in the quarter have reduced our net interest bank debt from $588 million at the end of first quarter to $520.3 million at the end of the second quarter. A portion of the reduction in net interest-bearing debt is a result of released working capital. We currently have both our model rigs under contract. As Topaz is working on Heimdall, and Emerald is mobilized to New Zealand. Mobilization of Emerald was delayed following COVID-19 lockdown in New Zealand. With a backdrop of the pandemic and the pressed oil price, We are extremely pleased with the award of the earlier communicated modular rig contract for to pass in the UK, securing the rig work until late 2023. Moving to slide four, revenue in the quarter was $192.8 million, a decrease of $44.3 million or 18.7% relative to the previous quarter. We saw a decline in revenue in both eastern and western hemisphere, but roughly 84% of reduction was in western hemisphere. The impact from the lockdown in Argentina is the single most important factor explaining the reduction in activity. In eastern hemisphere, reduction in activity is primarily related to reduced activity in our platform drilling division, as several operators choose reduced activity on some of their assets. Ebitda before acceptable items ended at $25.4 million of 13.2% of revenue. Compared to second quarter 2019, the increase is $0.3 million, but compared to previous quarter, it's a reduction of $2.7 million. The contribution from our land re-operation in western hemisphere has been most negatively affected. The margin expansion over the quarter is a result of the modern rigs contribution, as well as high margin in our oil and gas division. Later in the call, we will elaborate more on the performance in our various divisions. With a total of $6.3 million in exceptional items incurred in the quarter, reported EBITDA was $19 million. During the quarter, we recorded a capital expenditure of $6.2 million. This is a modest decrease from first quarter and substantially lower than in the run rate second half of 2019. The CAPEX in the quarter relates primarily to the activation and mobilization of modular rigs as well as growth CAPEX for our oil cruise division. We foresee that the CAPEX level reported the last couple of quarters represents a normalized CAPEX spend for the current activity level. Large oil service companies have recently also lowered their guidance on their capital investments, indicating CAPEX in the ballpark of 5% seven percent of revenue which is considerably lower than the pre-2014 level north of ten percent we welcome an industry with more capital discipline we will continue to monitor our own our own investment program along with the development in cover 19 oil price and signals from clients in order to adjust postpone or cancel our capex as appropriate as mentioned Our reported net interest-bearing debt came in at $520 million at the end of second quarter, which is significantly lower than what we reported in first quarter. Please also remember that Archer has, since the end of 2016, reduced its net interest-bearing debt from around $800 million to no $520 million. Next slide, please. The second quarter of 2020 will stand out as a very special quarter following the outbreak of COVID-19. Our focus continues to be the safety of our employees, our customers, and our stakeholders. We have navigated well through a period with regional and nationalized nationwide lockdowns, as well as implemented home office solutions where required. Most regions remain with home office solutions. But in Norway, most of our employees have been back in the office. Given the last few days increase in new cases in Norway, we will again increase the use of home office in order to minimize the risk to our operations. The largest impact from COVID-19 for us has been the national nationwide lockdown implemented in Argentina towards the end of March 2020. Government lockdown reduced our operation with more than 70% overnight. And around 1,300 of our employees were in suspension mode during the second quarter. President Fernandez has extended the lockdown multiple times, the latest until August 16th. During the initial phase of the lockdown in Argentina, Archer maintained the operation of our pooling units. But since June, there has been an increase in work of activity, and also the drilling operations have seen multiple signs of recovery as drilling rigs are being reactivated. For our platform drilling division, some of our customers reacted to the combination of pandemic and oil price by reducing their drilling operation and switching to maintenance mode, a total of six of our platforms under contract. Reduction in platform drilling activity is most predominantly in UK and in Brazil, where the operation on the Peregrino field has been put on standby due to COVID-19. Mobilization of Emerald in New Zealand was postponed by three months. We expect a modest uptick in the platform drilling activity late 2020. Next slide, please. Moving to slide six, platform drilling and engineering revenue increased by $2.1 million relative to the same quarter last year, but was reduced by $5.6 million compared to Q1. Despite reduction in revenue, EBITDA from the segment increased by $1.7 million as the modular rig commenced their operation and contributed to the operational results. The contribution from the model rigs lifted also adjusted EBITDA margin to 9.10% compared to 8% in the previous quarter. EBITDA contribution from platform drilling, model rigs and engineering remained solid and at the high level. Negative acceptable items recorded in the quarter of 0.9 million dollars relates to reduction in social security tax in Norway during the quarter. As a consequence of the pandemic and reduced activity, we have been forced to reduce our headcount by 240 employees, mainly in the UK, in addition to 500 employees being temporary laid off or working less through reduced rotation. We have a good working relationship with our employees and unions and are pleased that we are able to find solutions where we are able to retain most of the confidence during a difficult period. Archer2Pass commenced operations in the North Sea for Equinor during the quarter. During the quarter, we also formalized the contract whereby Archer2Pass was contracted by TACA UK to perform a 21-well plug-in abandonment campaign for their North Sea Comorant alpha platform. In addition to the model rig, the scope of the contract includes integrated P&A services delivered from Archer's engineering, rental, oil crews, and violent divisions. Finally, contract requires Archer to manage and deliver cementing swaths and reinjection services from third-party providers. This is a very good example of where Archer is elected as the integrator for multiple services during P&A operations. As mentioned, the pandemic led to a delay in the operation of Emerald, but is currently on track to start operations late August after a three-month delay in mobilization following lockdown in New Zealand. In the bottom graph, we see a chart displaying ARCHES total rigs under contract and the number of rigs in active drilling mode. Active drilling mode is the single most important activity indicator for our platform drilling division. Following a positive trend through the first quarter 2020, the reduction of six rigs going into maintenance mode in the second quarter explains the reduction in overall revenue. Also note that in the beginning of July 2020, three of 43 contracted platform sites to be operated by usher as part of this about 170 employees has been transferred to option drilling finally our engineering division grew their backlog with recent project awards in both nuke and norway next slightly best services delivered a strong seven percent increase in revenue compared to the second quarter in 2019 ending at $31.5 million. Compared to previous quarter, we saw a revenue reduction of 8.2%. The adjusted EBITDA margin was roughly 20% of revenue, and adjusted EBITDA ended at a very solid $6.6 billion, mainly due to contributions from our oil tools division. Compared to the same quarter last year, we saw EBITDA increase by close to 40%. Given the increase in demand for our oil juice services, we spent an additional $2.2 million in CAPEX in the quarter, supporting the underlying activity and output. We now expect reduced activity in second half, primarily due to reduced activity in Asia and America. We will discuss the oil juice development in greater depth in the next slide. Byline activity continued to be low, but we experienced some increased activity towards the end of the quarter. We are currently reviewing our wireline segments and aim to reorganize the division to better meet the expectations of our clients by ensuring profitability for our clients. In the quarter, we delivered an important integrated tender for Equinor together with Schlumberger and Veltec. We are hopeful that this strong alliance will secure additional work for wireline from 2021 onwards. Our joint venture, C6 Technologies, announced the first field test first field test of the C6 welder tractor in June 2020 for Astora in Germany. The tractor was deployed in a gas storage horizontal well where it conveyed an Archer logging tube. The job was run with a third-party logging truck meeting all the objectives of the intervention. Next slide please. Our oil tubes division has repeatedly shown solid growth from quarter to quarter. portion of the growth in this specific quarter can be explained by the product portfolio that we offer. As clients, as mobilized plugs, as backup for a scenario of temporary shutting down production. On the other hand, OilTrips has been winning market share as they have been able to provide solutions that our customers prefer. In addition to our traditional portfolio tools, we have been able to further develop proprietary technology as well as bring new products to market. This way, Oiltools has maintained their position as an industry leader for its smart and robust solutions for markets where well integrity, reliability and time savings are of importance. Oiltools' product portfolio consists of plug and plug solutions, soft recovery and P&A solutions, cementing solutions and finally well cleaning solutions. In addition to providing these technologies on a standalone basis to the customer, Oiltools has been successful in the combination of the different technologies and applications to provide unique solutions for customers. The most important benefit for our customer is the reduction in carbon emissions, increased operation efficiency, reduced rig time, and reduced personnel onboard. By being a technology leader, our value proposition is the primary reason why we increase our market share globally. which is the underlying factor explaining the growth in the last two years. We believe our positive development in the P&A and slot recovery area will continue as we expand geographically and broaden the product links. Next slide, please. To sum up the performance in the quarter for Eastern Hemisphere, we believe that the quarter has been solid given the market conditions. Despite a moderate reduction overall activity and revenue, Their contribution and margin has increased in the quarter. As explained earlier in the presentation, this is explained by, among others, more activity in higher margin areas of our business, such as oil tools and motor rigs. In an effort to reduce costs in the industry, we are together with our customers exploring the possibilities we have in the provision of integrated services. This is not a new phenomenon, but it has regained further momentum following the challenges in the previous downturn. It is a prioritized strategy for Archer to be the focus point for the provision of integrated services, which primarily will consist of coordinating work between our internal business areas towards the client, but also to enter into alliances with other open service providers. We will seek to be in the front seat in providing integrated services to our customers, and being represented on around 40 platforms in the North Sea will give us a competitive advantage in this coordination effort going forward. The latest modern rig contract we were awarded in April is a testimony to our efforts being fruitful. Integrated TNA service delivery includes services provided by our engineering, rental, oil tubes, and byline divisions in addition to the modern rig, and requires ARCHER to manage and deliver cementing, swath, and re-injection services from third-party providers. Slide 10, please. Before we discuss the financial and operational performance in our land-rearing division, we wanted to give you some flavor to the environment in which we operate in Argentina. There have been some key events the last year in Argentina, which is helpful to understand. In August 2019, the results of the primary election came as a surprise. Following the victory of center-left candidate Alberto Fernandez, the main Argentinian stock market fell 35%, the currency shed 25 percent of its value against the u.s dollar overnight the election of fernandez increased the political uncertainty in the country which seems to have led to a decrease in drilling activity as the drilling recount in argentina dropped from around 70 to 50. towards the end of march 2020 the government in argentina implemented a nationalized national wide lockdown in order to mitigate the pandemic consequently Drilling in the country was effectively stopped and the recount dropped to zero in April 2020. In parallel with the development of the corona pandemic, it became clear that Argentina would default on its own debt. And in 2020, the government defaulted on 65 billion US dollars of its outstanding debt. During the following months, the country continued with its lockdown while negotiating with the creditors. During the period of negotiations, the government imposed further restriction of foreign capital transactions. In effect, it has become more difficult to transfer cash out of the country, but it has also stabilized the official foreign exchange rate and inflation for now. In order to avoid massive layoffs, the government imposed double severance payment for terminations that is effectuated in 2020. In practice, this means that the right sizing of our employee base in Argentina is extremely costly. Despite the turmoil, Argentina has recently managed to reach an agreement with its creditor on the portion of debt that was in default. The Argentine government has signaled that it will subsidize upstream natural oil and gas production through price guarantees in order to remedy the negative impact seen on its oil and gas production. This is aimed at increasing activity for oil workers and to avoid the need for importation of LNG. We see the first signs of activity recommencing as the drilling rig count has come back from zero to 11 in July, of which two was operated by Archer. Next slide, please. Our revenue for land drilling was drastically reduced compared to first quarter 2020. As we saw revenue, 53.6% lower compared to Q1. As we can see from the bottom left graph, active drilling rates dropped significantly from first quarter. We did manage to keep some of our pooling units in operation in the quarter, But more than 70% of employees were suspended in the quarter, most of which were sitting at home with reduced compensation. We didn't receive compensation from our customers, which was sufficient to cover the salaries of our direct employees. We ended up with another report there that was breakeven. While adjusting for accepting items incurred in the quarter, our VTA in land reading was roughly $7.3 million. We were able to reduce headcount by around 80 people in the quarter. In order to avoid some of the severance payments required, we have focused on agreements for early retirement. For activity levels we currently predict, we continue to have a workforce that is larger than required. In third quarter, we see some other signs of activity returning, and we forecast to have several additional drilling rigs in operation during the third quarter. We have taken a decision to close the fluids division in Argentina as the market is competitive, and our activities below critical mass. Next slide, please. On May the 4th, Quintana Energy Services, or QS, announced its plan to merge its operations with another U.S.-based oil-free service company, KLX Energy Services. The merger closed on July 28, establishing an industry-leading provider of asset-light oil-free solutions across the full well life cycle. The service offering of the combined entity includes drilling, completion, and production-related products and services. We believe this is a good and strategic fit for both QS and Kelex, and that the merger will create value for Archer as a shareholder. Our ownership stake in QS gave us roughly 11.1% of the shares in the combined company, which will continue to be listed on NASDAQ. The rationale for the merger is cost synergies and scale economics. In addition to diversification of the business, and better liquidity for the combined company. The combined entities will have a broader reach and national wide footprint and will be the largest provider of coil tubing and the second largest wireline provider in the US onshore market. Archer will continue to have more representation as I will be a director also in the new combined company. With that, I hand the words over to Espen who will take us through the financial in greater detail. Thank you, Dag.

Looking at slide 13, we see that our total revenue for the first half of 2020 amounted to $429.9 million, compared to $461.3 million in the corresponding period last year. When netting off reimbursable revenue, we see that the operating revenue was reduced from $423 million in the first half of 2019 to $369.5 million this year, which is equivalent to a 12.6% reduction. In addition to the impact of COVID-19 and oil price reduction, the U.S. dollar strengthened compared to Norwegian kroner, Argentine pesos, and British pound in the period. Since we incur a substantial amount of revenue in these currencies, the U.S. dollar denominated table somewhat overstates the reduction in activity. EBITDA before exceptional items was 53.5 million dollars, or $5.1 million higher than a year ago. When adjusting for the exceptional items, the reported EBITDA ended at $40.8 million or 9.5% of revenue. Following COVID-19, we have had a round of impairment testing and concluded to impair a total of $7.4 million of our assets. split between goodwill of $4 million and our assets in Argentina impaired by $3.4 million. In our financial items, we include the results from associated entities, which amounted to $12.9 million on a year-to-date basis. This is primarily related to writing down the carrying value of our shares in QES, to market value. Going forward, we will mark to market this investment with the newly merged entity KLX Energy. In our other financial items line, we have recorded the gain on the debt forgiveness granted by Seedrill during April. The total gain of $45 million was partly offset by an accrual of interest up to new maturity dates. The new carrying value of the loan is $15.9 million. Going forward, we will not extend further interest on this loan. The gain associated with the debt forgiveness was partly offset by non-cash foreign exchange loss on an intercompany loan balance denominated in Norwegian kroner. The intercompany loan is held in a US dollar functional entity, while the corresponding intercompany debt is held in a Norwegian kroner functional entity. Net income for the quarter was $2.1 million. Next slide, please. Turning to the balance sheet on slide 14. Total current assets decreased by $12.4 million in the quarter, explained by a reduction in our receivables of roughly $30 million on a year-to-date basis, offset by an increase in cash and other current assets. The reduction in accounts receivables is partly a result of reduction in activity, and partly a reduction following a continued focus on collections. Total non-current assets were reduced by $58 million, partly explained by the decrease in goodwill and investments in associates as described in the previous slide, as well as a currency adjustment to carrying values denominated in other currencies than USD. On the liability side, the biggest difference is the reclassification of our interest-bearing debt to long-term, following the refinancing in April. In addition, we mentioned the reduction in the carrying value of our subordinated convertible loan, which was reduced from $58.3 million $15.9 million following the debt forgiveness. Nibs reduced significantly compared to fourth quarter, with nibs ending at $520.3 million. Next slide, please. Despite the turmoil we currently experience, we believe our financial position is strengthened during the quarter. Our refinancing secured two main items for us, a debt reduction of $45 million from the seasonal debt forgiveness, as well as new maturity profile for our debt. As per the profile displayed up to the right, we notice that there is limited amount of installments and repayments up to 2023. which is the maturity date of our amended loan agreement. In addition, the operations is generating positive cash flow, and hence we have a sound liquidity buffer of roughly $118 million at the end of the quarter. On the back of the pandemic, USD interest rates have dropped by roughly 2% compared to a year ago. representing in excess of $10 million in annualized interest savings for Archer. The bottom right graph displays the bridge of our net interest-bearing debt from year-end 2019 through June 2020. As is evident, a large portion of the reduction relates to the net debt forgiveness related to the subordinated debt. But a considerable amount of $20 million is a result of operational activity. Next slide, please. Even though our activity was impacted by corona, we delivered solid operational results in the quarter. In particular, our eastern hemisphere reporting segment. In addition to the solid operational results, we secured additional backlog for our high-margin modular rig business by the addition of a 27-month contract for Topaz. This new contract is not only a testimony for our modular rig capacity, but also our capability to deliver integrated services, both within Archer and along with partners to our customers. The reduction in our net interest-bearing debt is important, and a continued reduction is regarded as a key element in making Archer a more robust company. With the refinancing in place and available liquidity, we can focus on efficient operations. Given the macroeconomic environment, we reiterate that there remains significant uncertainty in our forecast for both the remainder of 2020 and beyond. We are though pleased to communicate a somewhat improved outlook for 2020 compared to what we said in relation to our first quarter trading update. As we see it today, we expect revenue in 2020 to be around 15 to 18% lower than 2019, compared to the previous guidance of a 20 to 25% reduction in previous quarter. We do expect third and fourth quarter to be somewhat weaker than second quarter, but this will depend on, amongst other, the lockdown in Argentina and the pace of additional drilling rigs in Argentina to be reactivated. For the remainder of 2020, we expect to be cash flow neutral to moderately positive, and ending 2020 with an estimated Nib in the range between $515 to $520 million at year end. We expect to operate within the bank covenants over the next 12 months, however, With the unprecedented market uncertainty, nothing can be guaranteed. With that, I will hand the call over to the operators for any questions. Thank you, Mark. Will you please open the line for questions?

Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 if you need to cancel. OK, we have one question through so far. That's from the line of Pontus Svensson of SEP. Please go ahead, your line is open. If your own phone is on mute, you will need to unmute that there.

Sorry guys, there I am. Hi, thanks for a good summary and good presentation. Doug, I have a question on the exceptional items concerning credit from tax payments in Norway. Is that a temporary thing or will that be recurring in future quarters as well?

Thank you for the question. This was at one time, we believe it was to two months that the government in Norway subsidized the national insurance part of it. We have a one-time positive effect there in Q2.

Okay. Thank you.

Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. Okay, there seem to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments.

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. Thank you.