Archer Limited

Welcome to the Archer third quarter 2020 earnings release. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present Doug Skinlow, CEO. Please go ahead with your meeting.

Thank you, Una. Good morning, ladies and gentlemen, and thank you for joining us for Archer's third quarter 2020 conference call. The call is being hosted from Stavanger. and I am on the call together with our Chief Financial Officer Espen Nugangel. In today's call, I will touch upon the key highlights and summarize Archer's operation for third quarter, and then hand the call over to Espen, who will walk us through the financial section and go through the 2020 updated outlook. Towards the end of the call, we will open the line for questions. Moving to slide two. I would like to note that information provided in today's call includes forward-looking statements as well as non-GAAP financial measures. Next slide, please. In the third quarter, we performed well, both operationally and financially, limited by macro environment, governmental regulations, and the ongoing pandemic. Over the quarter, we saw a solid drop in our net interest-bearing debt, no below $500 million. This is a drop compared to the second quarter of $20 million, or even more meaningfully, by $107 million year over year. Debt forgiveness related to our subordinated convertible loan, release of working capital, lower interest costs, disciplined capital expenditures, and cash flow from operations contributed to the reduction in our net interest-bearing debt. Every sale before capital items came in at $22.3 million for the quarter. Over the last few months, we have secured additional backlog in our platform drilling division by two contract extensions from our customers in the UK. Securing work for seven installations for four years and for seven installations for two years. On the back of some contracts, we are expecting to benefit from these extensions also in related business areas within the Archer Group. As a precautionary measure, we have engaged in a constructive and fruitful dialogue with our bank group, resulting in a more flexible covenant path in 2021 and 2022. This dialogue was initiated by Archer due to the increased uncertainty of how the future may develop on the back of the ongoing pandemic. The robust buffer we now have secured enable us to focus on our operations, cash flow generation, and suggest an adaptive environment in which we operate. At the turn of the quarter, we had a total of $138 million in cash and freely available and committed credit lines. We have communicated in the past that preserving our liquidity is one of our absolute priorities, and our success in achieving this leads us to comfortably prepaying $20 million on our loan facilities. The $20 million prepayment is merely an advance of the scheduled installments in the period from the first quarter 2021 to first quarter 2022. As such, we will, after the prepayment, have very limited fixed amortization on our debt until the second quarter of 2022. This gives the company a need for liquidity, the transparency we seek on our amortization schedule, and find a reduction in our interest costs. Slide four. Revenue in the quarter of $183.6 million was a decrease of $9.2 million, or 4.8%, relative to the second quarter. Quarter by quarter, we saw a decline in revenue in the eastern hemisphere, partly offset by the increase in the western hemisphere. The main explanation to the reduction in revenue is the discontinuation of our PD contracts on three assets in the North Sea. In Western Hemisphere, we saw muted signs of increased activity throughout the quarter, which we expect to continue further into the fourth quarter. EBITDA of the four exceptional items ended at $22.3 million, or 12.2% of revenue. Compared to both third quarter 2019 and previous quarter, the reduction is $2.1 million. Both Western and Eastern Hemisphere saw lower EBITDA contribution on a quarter-by-quarter basis. Later in the call, we will elaborate more on the performance in our division. With a total of $6.7 million in exceptional items incurred in the quarter, reported EBITDA was $15.6 million. During the quarter, we recorded capital expenditures of $5.6 million. This is a modest decrease from the first two quarters in 2020 and substantially lower than the run rate in the second half of 2019. The CAPEX in the quarter relates primarily to the activity, to the activation and mobilization of our land rigs, as well as growth CAPEX in . Next slide, please. Moving to slide six, platform drilling and engineering revenue decreased by $10.1 million relative to the same quarter last year, and by $12.5 million compared to previous quarter. The reduction is primarily explained by a reduction in activity as three ConocoPhillips platforms transferred out of Arthur's contract portfolio, as well as reduced reimbursable revenue of $7.5 million. Despite the reduction in revenue, EBT from the segment increased by $1.8 million as the modular rig contributed to the operational results. The contribution from the modular rigs lifted the adjusted EBT margin to $12.3 compared to 9.7 in the previous quarter. Increased margin in the segment is due to reduction in low-margin reimbursable income, increased contribution from high-margin modular rig operations, as well as a solid engineering project execution. Every day of contribution from platform drilling, modular rig and engineering remain solid and at a high level. After an initial delay of the mobilization of Emeril in New Zealand, Emeril commenced operation in late September. The path is currently being demobilized from its operation on Hevdal, and we will start preparing the rig for the work scheduled to commence next year for Taka in the UK. In the bottom graph, we see Archer's total rigs under contract and the number of rigs in active drilling mode. Following a positive trend in the first quarter of 2020, we experienced a reduction of six rigs going into maintenance mode in the second quarter, and an additional two rigs in the third quarter. At the beginning of the third quarter, three of the contracted platforms signed to be operated by Usher, bringing the figure down to 40 in the quarter. We are optimistic that we will see an increase in activity in fourth quarter, as we expect three additional weeks to be in active drilling mode in all the parts of fourth quarter, contributing the incremental revenue and MEDL. Finally, our engineering division continues to experience high activity both in the UK and Norway. Please take a seat. Our platform drilling operation is the backbone of our operation in the North Sea, and our presence at a total of 40 platforms provides business opportunities for our engineering, rental, model rigs, violin, and oyster business areas. It is thus important for us to maintain our market-leading position within platform drilling in order to monetize the synergies and additional work scope within our shop. We are therefore delighted that our clients have elected to continue their relationship with Archer by the award of the contract extension of four and two years for a total of 14 installations in the UK. These contract extensions reflect our clients' confidence in our ability to maintain safe operations while delivering improvements to the platform drilling and well intervention operations on their assets. In the graph to the left, we illustrate Archer's track record, of securing backlog through a combination of winning new platform drilling contracts and through retention of incumbent platform drilling contracts. When looking at the backlog of platform drilling contracts to the right, we note that there are a limited number of assets that is up for renewal in the short term. These long-term contracts are a total of 40 assets with the foundation of a long range of supplemental service offerings, including integrated service, P&A, and stock recoveries. Next slide, please. Value services delivered a 4% increase in revenue compared to the third quarter in 2019, ending at $30.9 million. Compared to previous quarter, we saw a reduction of 1.9% in revenue. The adjusted EBITDA margin was roughly 12% of revenue, and adjusted EBITDA ended at $3.8 million. Reduction in EBITDA and EBIT margin is a result of fall through from lower revenue, primarily from high margin operation in Asia and Africa, combined with an unfavorable product mix in our oil and gas operation, and negative contribution from our violent reporting segment. In the quarter, we had a successful contract campaign in Northsheet, and the client was happy with our capability to run a large number of operations in few runs. saving the client time and money, as well as contributing to their low-carbon emission agenda. We will continue to commercialize the contract and have currently deployed one unit on a contract in the Middle East. We had a first run with our mechanical casing packer, or MCAP, for Equinor. Our MCAP system improves the annulus seal integrity and overcomes the shortcomings of cementing technology. MCAP technology is certified gas-tight, or V0, and performs to the highest integrity standards. We believe the MCAP system will be another growth pillar in our oil-fuel division. Next slide, please. Archer is committed to contribute to the ongoing energy transition. Short-term, we can best contribute by ensuring efficient operations with as low emissions as possible. We continue to develop new technologies and services that reduce energy consumption and support our client's low-carbon agenda. Our one larger approach is our branding of our initiative towards integrated service offerings. We have broad portfolio of products and services within stock recovery and P&A. Archer can deliver best value to clients in this phase of their operations. We want to deliver more efficient operations by increasing the scope and smarter cooperation within Archer service lines, as well as by closer relationship to complementary service providers. By doing this, we can reduce the cost for our clients and reduce the number of people on board. The direct benefit for the client is cost-saving, while neither compromising service quality nor safety. The benefit for the society is represented by lower emissions, reduced footprint, and use of resources. Archer will explore business opportunities within the green energy business. In order to benefit from such, we would need to identify synergies with our current operation that moving into new markets is based on competitive advantages and our competitors. As mentioned in the previous slide, we conducted a successful campaign with one of our contract units. The potential of the application of contracts is substantial due to the ability to, with large, run multiple operations in single runs, including doing deep and long wells. With traditional wireline, we are limited by the strength of the wire. The main problem with going deep and long is not when you go into the well, but often the friction and weight when you pull out. By analyzing the latest contract campaign we conducted, we estimate that we would have needed 31 runs with traditional wireline, but managed with nine runs using our contract system. The estimated CO2 saving by using the contract system was in excess of 800 tons. The cost saving of 66% for our clients was primarily driven by the short time period needed in order to conduct the campaign. We saved the client about 17 days on the operation. The oil and gas industry in the North Sea must bring further efficiency saving to the operations in order to bring down costs and minimize CO2 emissions. The Archer's P&A system, Stronghold Defender, has verified that an annual barrier can replace a cement barrier for eternity. Archer has, along with our client, worked to qualify a so-called creeping shale as an eternal barrier rather than using cement, which would be the traditional way for the barrier. Replacement of cement barrier with a natural barrier prevents hydrocarbons from flowing to the surface. Indirect emission saving from using creeping shale as a barrier rather than cement barrier is a two-day rig time saving per well. For the feed in question with seven wells, we estimate the cost saving for this approach to be some $7 million, while the CO2 emissions was reduced by close to 100 tons. The CO2 emission reduction does not include saving by not using cement, so the overall CO2 saving is higher if you take this into consideration. Next slide, please. Our revenue for land drilling was reduced by 49% compared to third quarter 2019. Compared to previous quarter, we see an increase of 14%. The increase came from low levels, but the trend supports are more optimistic also going forward as more rigs are being put back to work. We report a negative EBITDA from land drilling, mainly driven by the low activity and redundancy costs. We have reduced our headcount in Argentina with about 200 this year following the reduction in activity. At the end of the quarter, we had 304 employees in suspension, representing 18% of our workforce in Argentina. This compares to a total of 1,310 in suspension at the end of June, which represented 72% of our employees. Roughly 900 of our employees came back to operations during the quarter. As we can see from the bottom right graph, active units increased substantially compared to second quarter. The increase is both for drilling rigs, work on rigs, and pulling units. COVID-19 cases increased in Argentina throughout the third quarter, and we continue to monitor the situation closely to ensure the safety of our employees and customers. The number of quarantined personnel fluctuates, and government imposed regulation could impact activity going forward. Slide 10, please. In October, the president of Argentina, Alberto Fernandez, visited one of Archer's drilling rigs to announce a gas incentive plan to boost Argentinian gas production. The plan, unveiled in Oiken, is to give subsidies totaling $5.1 billion to shale gas drillers to revive production in Vaca Muerte and attract as much as $5 billion in investments. The four-year subsidy program is expected to cost Argentina $1.5 billion in 2021. The plan aims to stop the production decline and replace Argentina's natural gas imports by local production, boost investments, boost local employment, and boost work for Argentinian service companies, President Alberto Fernandez, together with other authorities, took the time to visit and walk around Arsenal's drilling rig, DLS 167, one of the drilling rigs equipped with the latest generation technology that has drilled for YPF for more than five years now. The market environment in Argentina continues to be impacted by COVID-19, but we are currently expecting a recent positive activity trend to continue into the fourth quarter. With that, I hand the words over to Espen, who will take us through the financials in greater detail.

Thank you, Dag. Looking at slide 11, we see that our total revenue for the first nine months of 2020 amounted to $613.5 million, compared to $688.9 million in the corresponding period last year. When netting off the reimbursable revenue, we see that operating revenue was reduced by $96.7 million from $626.5 million in 2019 to $529.8 million this year. The reduction is equivalent to 15.4%. On a quarterly basis, Operational revenue of $160.2 million is a decrease of $43.3 million, or 21% year on year. The reduction is due to a significant drop in activity levels, mainly related to rig shutdowns in Latin America following COVID-19, partly offset by the modular rigs back in operation. and increased activity levels for engineering and oil tools compared to last year. On a year-to-date basis, EBITDA before exceptional items was $75.8 million, which was $0.6 million lower than a year ago. Exceptional items in the reporting period was $6.7 million, and on a year-to-date basis totaled $19.4 million. Most of the exceptional items are incurred in our Argentine operation and is a result of COVID-19 pandemic. When adjusting for the exceptional items, the reported EBITDA ended at $56.4 million. year to date, or 9.2% of revenue. And for the quarter reported EBITDA came out at $15.6 million. Compared to the corresponding quarter last year, reported EBITDA reduced by $7.8 million. EBIT ended at positive $2.8 million in the quarter. In our financial items We include the results from associated entities, which amounted to $5.4 million in the quarter, primarily related to writing down the carrying value of our investment in C6 technologies. Changes in the carrying value of our investment in KLX will be recorded in other financial items, as we will account for the changes in valuation through Mark II market going forward. Interest expense of $7.4 million is reduced 28% compared to third quarter 2019. Net loss for the quarter was $12.3 million, and on a year-to-date basis, it was negative $10.3 million. Next slide, please. Turning to the balance sheet on slide 12, total current assets decreased by $16.6 million in the quarter, explained by a reduction in our receivables of roughly $20 million, offset by an increase in cash and other current assets. Their 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 $12.9 million, primarily as a result of the impairment of our carrying value of C6 and the mark-to-market of our investment in KLX, as well as depreciation of our operating assets. This reduction was partly offset by an increase in our carrying value of goodwill following currency adjustments. On the liability side, the biggest difference is the reduction in our net interest-bearing debt following repayments under our revolving facility during the quarter of $15 million. Next slide, please. Archer continues to generate positive cash flows. This enables us to reduce our debt, evidenced by the continued reduction in net interest-bearing debt. At the turn of 2016, we had a need of close to $800 million, which at the end of third quarter 2020 was less than $500 million. a reduction by close to $300 million. The cash flow generation has been accompanied by diligent cash preservation in order to safeguard our liquidity, and our available liquidity was close to $140 million at the end of the quarter. We are comfortable that this is more than sufficient for our operations going forward. We have, as a precautionary measure, approached the lenders under our main loan facility to get some additional headroom to our covenants in the period ahead. The background for this is related to the increased market uncertainty we currently experience. Technically, we have reached an agreement to adjust our leverage ratio covenant for primarily 2021 and 2022. In exchange for the amendments, we propose to prepay a total of 20 million of installments that are scheduled in 2021 and first quarter of 2022. When we look at the debt maturity profile, taking into consideration the $20 million prepayment in 2020. There is very limited scheduled amortization on our various loan facilities before maturity in 2023. Slide 14, please. To sum up the quarter and the key events, we secured substantial additional backlog to our platform drilling operations by securing contract extensions for a total of 14 installations in the UK. The reduction in our net interest-bearing debt is important and a continued reduction is a key element in making Archer a more robust and sustainable company. the amendments to the covenants, we increase our headroom and improve our flexibility so that we can focus on our operation and to adapt to changes in the demand for our services. Given the macroeconomic environment, we continue to be cautious on our outlook statements. We do expect activity in fourth quarter to be higher than what we saw in third quarter. both in eastern and western hemisphere. The key drivers in both land drilling and platform drilling will be the reactivation of drilling rigs. As we see today, we expect revenue in 2020 to be around 10 to 15% lower than 2019. In relation to our second quarter report, we guided a 15 to 18% reduction, While in the first quarter, just after the outbreak, we guided on a 20 to 25% reduction in revenue. For the remainder of 2020, we expect to be cash flow neutral to moderately negative and ending 2020 with an estimated nib in the range between 500 to 515 million dollars at year end. With that, I will hand the call over to the operator for any questions. Thank you, Knox. Will you please open the line for questions?

Of course. Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will just be a brief pause while any questions are being registered. And just as a reminder, that was 01 on your telephone keypad now. And as there are no questions, I will hand it back to the speakers for closing remarks.

Thank you.

We appreciate everyone joining us today. quarter's call. And we look forward to speaking to you next quarter. Thank you and have a great day.