Archer Limited

Welcome to the ARCHER fourth quarter 2020 earnings release call. Throughout the call, participants will be in a listen-only mode and afterwards will be a question and answer session. Today, I'm pleased to present Doug Skinrow, CEO, and Espen Ureiner, CFO. Please begin your meeting.

Thank you, Richard. Good morning, ladies and gentlemen, and thank you for joining us for ARCHER's fourth quarter 2020 conference call. The call is being hosted jointly from Stavanger and Oslo, and I am on the call together with our Chief Financial Officer, Espen Johan. In today's call, I will touch upon the key highlights and summarize Archer's operations for the fourth quarter, and then hand over the call to Espen, who will walk us through the financial section and the 2021 outlook. 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 includes forward-looking statements as well as non-GAAP financial measures. Next slide, please. Revenue in the quarter of $210.6 million was an increase of $27 million or 15% relative to the third quarter as we saw an increase in revenue in land drilling and our custom drilling division. The main explanation for the increase in revenue is reactivation of rigs in Argentina, increased activity from custom drilling, as well as additional revenue in the quarter from our modular rigs. On the back of increased activity and revenue, we are pleased to see that this is reflected in our reported EBTR. with an increase of nearly 23%, or $3.5 million compared to third quarter. Ebitda, with four exception items, ended at $23.3 million, or 11.1% of revenue, with an increase of $1 million from third quarter. Despite quite large tax charges in the quarter, we reported a net positive income, which has been shed further light to later in the quarter. Over the year, we have seen a substantial drop in our net income during that. Now at $504 million. The drop from year end 2019 amounts to $78 million. Next slide please. Moving to slide four. Revenue from custom drilling, engineering, and our modeling rigs increased by $18.4 million from third quarter and it's at the same level as 10 quarter last year. Increased quarter of a quarter of 16% is primarily explained by increasing number of rigs in action drilling mode, as well as solid contribution from all modular rigs. On the back of increased activity, energy efficiency segment increased by $2.2 million compared to the third quarter. After an initial delay of mobilization of Emerald in New Zealand, Emerald commenced operations in late September and had its first full courtroom operation. Topaz has been demobilized and its operation hangs on, and we start preparing the rig for the P&A contract with TACA UK next year. Slide five, please. Our web services division delivered revenue of $13.3 million. a modest reduction compared to the previous quarter. The EBITDA margin was 14.2% of revenue, and EBITDA ended at $4.3 million, which was an increase of $0.5 million compared to the previous quarter. Both the EBITDA margin and EBITDA increase compared to the first quarter is explained by a modest improvement in our violent emissions, and activity is picking up. The new integrated wireline contract will have financial impact on our financial results from the second quarter onwards. On the product development side, we installed the first mechanical casing packer, or MCAP, in the industry. Our MCAP system improves the annual seal integrity and overcomes the shortcoming of cementing technology. MCAP technology is certified gas tight and performs the highest integrity standards. Next slide, please. Moving to slide six, we wanted to give you some further input on the contract awarded by Equinor to our wireline division. The total estimated contract value over five years is some $2.4 billion, or close to $300 million. The contract is implemented to Archer's current activity, and we have very limited wireline work scope for Equinor today. Archer is the contract counterpart to Equinor in this sector. And services provided by our alliance partners, Veltec and Schlumberger, will be invoiced to Archer. Archer's direct portion of the contracting scope is estimated to between 35% and 40%. Archer will, under the contract, provide mechanical and wireless services and logging, while Veltec will provide tractor services, and Schlumberger will provide their superior logging and pep tracking services. The combined offering is unparalleled in the industry. The key benefit to Equinor is access to the best technology for reduction in personnel on board. Providing both the best utilization of the combined wireline and plastic green crew, as well as cross-training to run all of our equipment. We look forward to working with our partners at Equinor to drive efficiency and improve production. Next slide, please. Our revenue for land drilling was reduced by 36% compared to fourth quarter of 2019. But compared to previous quarter, we see an increase of 25%. The increase came from low levels. The trend supports a more optimistic outlook going forward as more rigs are being put back to work. As you can see from the bottom graph, acid drilling units increased substantially compared to second quarter, second and third quarter of 2020. Increase in vote for drilling rigs, work over rigs, and pooling units. In the southbound Argentina in Comodoro, we see activity levels stabilizing at a level somewhat below the pre-COVID level of activity. With our next drilling rigs operation, annual revenue will be reduced by 40 to 50 million dollars compared to pre-COVID. Lower level of activity and limited ability to transfer personnel internally within Argentina has forced us to continue our right-sizing of operations to reflect what we perceive as a new activity level in the South. As we have highlighted before, it's a very costly and time-consuming process to lay off people in Argentina. The process requires a collaboration between AASA, strong unions, clients, and government policies. In the North of Argentina, on the back of a nationwide gas incentive plan, the activity large extent rebounded and we expect to be close to pre-COVID-19 late 2021. Slide 8 please. Archer is committed to contribute to the ongoing energy transition. Our main contribution is to lower old and client carbon footprint. Our biggest contribution is to reduce our client emissions through efficient operations with as low emissions as possible. We will continue to develop new technologies and services that reduces energy consumption and support our client's low carbon agenda. The second important factor to understand is Archer's relative resilience position in the oil service market. About 90% of our global activity is in growth and operations. Growth means that the field has been developed, infrastructure is in place, and the field is already producing. At this stage, investments are typically smaller, and there's less uncertainty in the investment position. There is typically also a shorter period until you earn cash flow to repay your outlay. In an environment where there would be less demand for oil and gas long-term, oil and gas companies are more likely to prioritize spending in broker development. Hence, the demand for artist brokerage services are more stable and more predictable than oil service companies that are more exposed to the greenfield market. Furthermore, Archer has extensive experience and solutions for permanent abandonment of rents. This is a significant market going forward. We should estimate that there are 2,500 rents that will be permanently abandoned in the next 10 years in the North Channel. Archer will have a significant business in the P&A market for decades to come. In order to have a sustainable business, you must, in addition to deliver low-carbon solutions in a long-term market segment, deliver for 90% to improve the capital structure. OSHA has, over many years now, demonstrated that we have delivered for 50% for 90% results under challenging market conditions and improved the capital structure. We are exploring green energy as a new business area, but have not concluded on the way forward yet. But there is no doubt that we will explore and develop when we find the opportunity to deploy our competence in an attractive market segment. With that, I will hand the words over to Espen, who will take us through the financials in greater detail. Thank you, Doug. Looking at slide nine, we see that our total revenue for 2020 amounted to $824 million. compared to $928.6 million last year. When netting off the reimbursable revenue, we see that operating revenue was reduced by $118.5 million in 2020, ending at $715.1 million for the full year 2020. The reduction is equivalent to 14.2%, explained by the impact of COVID across our divisions. On a quarterly basis, operational revenue of $185.3 million is a decrease of $21.8 million or 10.5% year on year. The reduction is due to a 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 compared to last year. For 2020, EBITDA before exceptional items was $99.1 million, which was $4.8 million lower than in 2019. Exceptional items in the reporting period was $4.2 million, and on a year-to-date basis total $23.6 million. Most of the exceptional items are incurred in our Argentine operations and is a result of the COVID-19 pandemic. When adjusting for exceptional items, EVTA reported for 2020 ended up $75.5 million or 9.2% of revenue. For the fourth quarter, reported EBITDA came out at $19.2 million compared to the corresponding quarter last year, reported EBITDA reduced by $3.3 million. EBIT ended at positive $7.6 million in the quarter, and with net financial items amounting to positive $7.3 million, Our net income before tax amounted to $15 million. The net financial items were positively impacted by foreign exchange effects on an intercompany loan agreement, which does not have any cash impact, in addition to a market-to-market value adjustment for our shareholding in KLX Energy in the quarter. Net interest expense of $7 million represents a reduction of 28% compared to our fourth quarter 2019. The tax expense of $12.2 million is explained by, amongst others, an expense of deferred tax assets in Argentina, resulting in a net positive income of $2.7 million for the quarter. Slide 10, please. Total current assets increased by $7.9 million in the quarter, explained by an increase in our receivables of roughly $40 million, offset by a reduction in other current assets. Total non-current assets increased by $7.2 million, primarily as a result of the currency adjustments to our recorded goodwill. which was partly offset by our reduction in our deferred tax assets as mentioned in the previous slide. On the liability side, the biggest difference is the reduction in the current portion of our net interest-bearing debt following the amendments carried through in fourth quarter on our revolving loan facility and the corresponding increase in long-term portion of interest-bearing debt. The increase in equity of $14.1 million is a result of the positive net income for the quarter combined with currency adjustment of our goodwill, which does not impact the P&L. Next slide, please. When we look at the debt maturity profile, we have very limited scheduled amortization on our various loan facilities before security in 2023 of our main facility. When the pandemic hit the world, one of our primary focuses was to preserve our liquidity in order to enable Archer to withstand the crisis. However, that evolved. For us, the pandemic has not had as large impact as we feared in the middle of March 2020. But looking back at 2020, a year which forever will be regarded as one of the most debasing years in the economy, Archer has generated cash, reduced our credit lines, repaid debt prior to the scheduled amortization, extended the final maturity of our main debt facilities, negotiated debt forgiveness, adjusted our financial covenants and increased our financial flexibility, while we overall achieved our target of preserving our liquidity position. Following the various amendments to the loan agreements conducted in fourth quarter, including committed reduction of $20 million on the RCF and installments of 3.5 million euros on our to-pass facility, we continue to have in excess of 110 million dollars in available liquidity. Slide 12, please. To sum up, fourth quarter was a solid operational quarter with improved financial metrics and increased EBITDA both before and after adjustments for exceptional items. We delivered positive net income as well as positive free cash flow. Furthermore, during the quarter, we laid the foundation for further bar land work following the award of the integrated bar land contract from Equinor. Looking forward and given the macroeconomic environment, we continue to be cautious on our outlook statements. Market analysts expect overall market expenditures in 2021 to be in line with 2020, while we expect improved financial performance in 2021 on the back of a strong backlog and market position. As we see it today, we expect revenue in 2021 to be moderately higher on our second half 2020 run rate, We are preparing for a general increase in activity leading to an increase in EBITDA reported in 2021 of 10 to 20% compared to full year 2020. We will continue our investment discipline and estimate CAPEX of 3 to 4% of revenues and finally the expected positive free cash flow will reduce our needs year over year. We are further exploring accretive M&A opportunities, which can segment our position within the brownfield operations and the well P&A markets. With that, I will hand the call over to the operator for any questions. Thank you, Richard. Will you please open the line for questions?

Thank you. As a reminder, if you do wish to ask an audio question, please press 01 on the telephone keypad now. And as another reminder, if you do wish to ask an audio question, please press 01 on the telephone keypad now. There appear to be no audio questions at this time. So, speakers, there appears to be no questions at this time. Would you like to say any closing remarks or just give another reminder?

We just 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.