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Edited Transcript of ARCHER.OL earnings conference call or presentation 8-Aug-19 7:00am GMT

Q2 2019 Archer Ltd Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Archer Ltd earnings conference call or presentation Thursday, August 8, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dag Skindlo

Archer Limited - CFO & Executive VP of Strategy

* Kjell-Erik Østdahl

Archer Limited - Executive Chairman

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Presentation

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Operator [1]

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Hello, and welcome to the Archer Second Quarter 2019 Earnings Release. (Operator Instructions)

Today, I am pleased to present Executive Chairman, Kjell-Erik Østdahl; and Dag Skindlo, CFO. Please begin.

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Kjell-Erik Østdahl, Archer Limited - Executive Chairman [2]

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Well, thank you, Hugh, and good morning, ladies and gentlemen, and thank you for joining us for Archer's Second Quarter and Half Year 2019 Earnings Conference Call.

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.

I will summarize Archer's highlights from the second quarter before Dag will review operation and the financials. Before ending the call, I will open the line for questions.

Next slide, please. The second quarter marks the fourth quarter in a row with EBITDA margin above 10%, showing that we have been able to deliver stable financial performance at a higher level coming out of the downturn.

We are also pleased to announce that the Modular Rig Archer Emerald now has secured work in New Zealand with drilling expected to commence in second quarter next year. This is an important milestone, and we believe that the demand for the 2 modular rigs that Archer possess will continue to increase in the years to come as more and more platforms are looking for cost-effective solutions to their P&A requirements.

In April of this year, we announced the renewed contract for the Alba Northern and Captain platforms in the U.K. sector of the North Sea operated by Chevron. The new contract commenced in 1st May 2019 and ensures continuity of platform drilling operations and maintenance management services on the 2 platforms until at least 2024.

In Oiltools, we see that our clients are increasingly adopting the newer technologies developed. Clients are again interested in attempting new, more effective solutions, and Oiltools has a strong set of tools to engage in different parts of the well lifetime.

I will now hand the word over to Dag.

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Dag Skindlo, Archer Limited - CFO & Executive VP of Strategy [3]

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Thank you. Moving to Slide 4. Operating revenue in the quarter was $235.6 million, an increase of $11.2 million relative to the corresponding quarter last year. As mentioned, EBITDA ended at $23.5 million, up 90% from second quarter last year.

We reported a positive EBIT of $11.3 million versus a loss in the same quarter last year. Our 12-month trailing EBIT margin was 4.7%, better than any 12-month period since the IPO of Archer. The positive EBIT translated to a positive net income of $3.5 million. Net debt was marginally down to $580 million.

Moving to Slide 5. Platform Drilling & Engineering revenue increased by close to $25 million relative to Q2 2018, an increase of 24 percentage. A large part of this increase is related to the growth in number of operated platforms for Equinor in Norway.

EBITDA increased by $900,000 relative to Q2 2018. Please note that the EBITDA margin varies slightly from quarter-to-quarter based on the active platform mix, repair and maintenance cost, level of reimbursement revenue and level of rental income.

CapEx spend continues to be low, ending at $1.1 million. We will see this increase in second half as we recertify Emerald and perform some 5-year inspections on certain drilling equipment we manage for Equinor.

As mentioned in the beginning, we are happy to announce a signed contract for the Modular Rig Archer Emerald. I will touch more on the contract in the next slide.

Our other modular rig, the Topaz, is also attracting attention from clients in the North Sea. We are hopeful that a contract can be signed for Topaz during the second half of 2019.

This quarter was characterized by some wins but also reductions in activity. The new 5-year contract for Chevron in the U.K. continues to build on our client relationship from 2004.

On the negative side, Shell in the U.K. decided to use a different technical solution for final P&A on the Brent Charlie, meaning that our contract scope will be meaningfully reduced as of August this year.

We are also no longer present in Greece as Energean ended drilling operations in May this year. Engineering sees good, stable development and is growing in line with the portfolio of Platform Drilling.

Next slide, please. The Archer Emerald is now contracted to go back to New Zealand where it previously successfully worked on the Maui A platform in the period 2012 to 2014. The contract has allowed us to reactivate and modify this idle rig and add meaningful revenue and EBITDA for 2020.

The fix start of the 5-well contract with OMV is expected to start with drilling operation in Q2 next year, completing the drilling program within 11 months. Furthermore, 2 1-well option could extend that with a further 5 months, bringing the total time on signed well into 2021. The rig will then be fully operational and ready for other type of engagements.

Next slide. Well Services delivered a 10% increase in revenue compared to second quarter 2018, ending at $29.5 million, roughly in line with the previous quarter. EBITDA was up 18% from same quarter last year.

Oiltools has, over the last 2 years, spent considerable efforts into developing new tools and new applications. As such, we are experiencing strong growth in a number of countries where we -- where new technologies are being deployed. Especially within slot recovery and P&A, clients are keen to test new and propriety technology developed by Archer.

Furthermore, we have recently strengthened both the product management team and operations. Oiltools is a good growth platform as commercialization of the tools and services reaches more clients and geographies.

Wireline, as noted in previous quarter, had a soft second quarter due to the planned shutdown of client platforms in the North Sea. The shutdown primarily affected the month of June and July. Logging revenue also declined as a result of the platform shutdown.

This autumn, we expect to see less mechanical activity in Norway compared to last year as our main client in Norway opens up the coiled tubing campaign. However, we have recently produced a 12-kilometer composite rod for our ComTrac system and performed several operations for Equinor. We are hopeful that ComTrac, over time, will become a meaningful contributor to Wireline.

Next slide, please. Revenue is down 7% relative to same quarter last year due to a 32% depreciation of the Argentine peso during the last 12 months. The margin for Land Drilling was negatively impacted by high repair and maintenance costs, excessive standby as rigs were waiting on location and unfavorable macroeconomics where inflation outpaced depreciation of the currency. EBITDA ended at $9.7 million or 12% of revenue.

Last year, we reported negative EBITDA in the second quarter. This shows that we have come a long way in providing a stronger and more stable Land Drilling segment.

Bolivia is now down to one working rig, and the number of rigs in Argentina is expected to drop by 1 or 2 rigs during Q3 and Q4 as clients are cutting back on some drilling programs. However, there's a strong driver client in Vaca Muerta to increase the capabilities of the rigs and, as such, many tenders for higher-spec rigs and upgrades are currently in the market.

This has also attracted new rigs to enter the country as the operations in Argentina are drilling deeper, longer and require more efficient drilling operations. We believe we are well-positioned to take advantage of this new drive for longer laterals, but we will have to perform certain effort in the short term to be at the forefront. However, we maintain our capital discipline and are not planning to acquire new drilling rigs.

On Slide 9, we see that Archer revenue is quite stable from quarter-to-quarter, with second quarter 2019 ending at $235.6 million.

We are pleased to report the fourth quarter in a row with a strong EBIT -- reported EBITDA, this quarter ending at $23.5 million, an increase of $11.2 million relative to second quarter 2018.

CapEx spend in the quarter was low at $5.5 million or 2.3% of total revenue. We expect CapEx to increase in the coming quarters, in line with previous guidance, including CapEx spend on recertifying of Archer Emerald commencing contract startup next year. Net debt improved by $1.3 million in the quarter, now at $580 million.

Turning to the more detailed profit and loss statement on Slide 10. The reimbursable revenue was up $7.5 million compared to first quarter, while the operating revenue was up by $2.5 million.

Reported EBITDA ended at $23.5 million, which is in -- which is a reduction of $1.5 million from the first quarter of 2019. As mentioned before, the quarterly results were somewhat negatively impacted by Land Drilling and Wireline.

We reported positive EBIT of $11.3 million, which is in line with the previous quarter. We reported other financing income in the quarter of $4.8 million mainly due to unrealized foreign exchange gain on an internal loan between Norway and Bermuda.

Results from associated entities was negative by $3.7 million in the second quarter, mainly accounting for our share of the net loss in [GVS]. The net reported tax expense was $600,000 in the quarter, giving a net positive income of $3.5 million for second quarter 2019.

Turning to the balance sheet on Slide 11. The main changes are related to implementation of the new leasing accounting standard, as mentioned in our first quarter presentation. Total current asset increased by $13.1 million in the quarter, mainly as a result of strong cash flow generation in the quarter, increasing cash, cash equivalents and restricted cash by $18.9 million. Restricted cash is excluded from our calculation of net interest-bearing debt.

We kept additional cash in Argentina at the end of Q2 in anticipation of rig upgrades. This cash, which is classified as restricted cash, explains why the strong operating cash flow in the quarter did not fully reduce reported net interest-bearing debt.

Total noncurrent asset increased by $11.8 million mainly due to the right-of-use assets increase in the quarter. Current liabilities increased by $23.4 million in the second quarter as a result of increased portion of short interest-bearing debt that increased accounts payable liability.

Long-term liabilities reduced by $3.6 million in the quarter due to reduction in long-term interest-bearing debt by $4.2 million.

I will now hand over to Kjell-Erik for the summary and outlook on Slide 12.

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Kjell-Erik Østdahl, Archer Limited - Executive Chairman [4]

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Thank you, Dag. Summing up, we continue to report EBITDA margin of more than 10% coupled with no restructuring costs. Archer delivered strong operational performance for the rightsized company.

We now expect that the second half of 2019 will be roughly in line with the first half of the year. This is despite the slight drop in the number of active platforms and drilling rigs during the autumn for Platform Drilling and Land Drilling. CapEx is likely to be around 4% of revenue following the contract award to deploy Archer Emerald.

Furthermore, as mentioned last quarter, we will start discussions with our banks this autumn regarding our bank debt maturing late next year. We generate meaningful cash flow, and available liquidity was about $145 million at the end of the second quarter.

With that, I will hand the call over to the operator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Okay. At this stage, there seems to be no questions in the queue for today. Can I please pass it back to you?

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Unidentified Company Representative, [2]

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Yes. We have received a question from the webcast from Terje Fatnes from SEB asking, you mentioned that the Emerald will contribute with meaningful revenues and EBITDA in 2020. Can you be a bit more specific and also quantify CapEx and mob costs ahead of commencing drilling operations?

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Dag Skindlo, Archer Limited - CFO & Executive VP of Strategy [3]

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Thank you, Terje. As you know, we have deliberately not guided very specifically on this contract. That is partly due to our client wanting to have disclosure on this and also for competitive reasons. However, I can say that, historically, a full year contract like this used to generate $5 million to $10 million EBITDA per year. So I don't think they're very far from those ranges. I don't want to be more specific than that. There is a good margin on EBITDA on these contracts.

On the CapEx side, there's 2 elements, it's the recertification and there is some modification has been requested by the client. Those are in excess of $5 million in total. The full -- the mob cost is fully recovered by the client. And the full contract more than -- the cash flow from the contract more than paid for the CapEx and recertification to put this rig back to work. So overall, a good cash flow-generating contract, good margins.

And we hope that the rig will stay in New Zealand longer than the initial period. And the rig will be warm and ready for other contracts. The client is already asking for possibility for having even more than the options because they know that there is some competition and some tenders coming out in the market that might require Emerald to leave New Zealand. So I think at the moment, we are very happy with this award and it's a major milestone for Archer.

Any other questions?

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Operator [4]

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There are currently no questions on the phones. Are there any further questions from the web?

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Unidentified Company Representative, [5]

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No.

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Kjell-Erik Østdahl, Archer Limited - Executive Chairman [6]

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Okay. Then we appreciate everyone joining for us this quarter's call, and we look forward to speaking to you next quarter. Thank you, and have a good day.

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Operator [7]

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This now concludes the call. Thank you all very much for attending, and you can now disconnect.