ARCHER LTD ORD NEW (OTCPK:ARHVF) Q1 2016 Earnings Conference Call April 29, 2016 8:00 AM ET
John Lechner - Chief Executive Officer
Christoph Baush - Chief Financial Officer
Good day and welcome to the Archer First Quarter 2016 Results Presentation. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Christoph Baush. Please go ahead.
Thank you, Julianne. And thank you for joining us for Archer’s first quarter 2016 earnings call. Today’s call is being hosted from Stavanger, Norway. Joining me on the call is John Lechner, Archer’s new Chief Executive Officer and Dag Skindlo, who will take over from me as Chief Financial Officer in May. I’ll provide a short overview of the key events during the quarter and walk you through the financial results. After that John will provide you with an operational update and then we’ll open it up for Q&A.
But before I start, please note that the information provided in today's call includes forward-looking statements, which are not historical facts. We also talk about EBITDA which is a non-GAAP financial measure. That was historical being used by Archer as a measure of operating performance and we also use EBITDA to report compliance under our credit facilities.
In the appendix of our earnings release we provide a reconciliation of the EBITDA to net income which is an accepted financial measure under U.S. GAAP. A detailed disclaimer is included in today’s earnings release.
As you all know, business fundamentals FTT related across the Board in the first quarter. Most of our customers have announced additional cuts of their 2016 expenditures during the beginning of the year with North American E&P companies announcing reductions in the estimated annual spend of close to 50% and international oil companies of about 20%.
This is impacted our revenue in the first quarter, which reduced by close to 19% sequentially, but excluding the devaluation effect in Argentina by approximately 8%. We continued to focus on the things we can control in this market, which is our safety and our operational performance. And John will talk more about that.
At the same time we also continue to work on our cost structure to offset the effects from lower activity levels and lower pricing. This unprecedented downturn which has now lasted for almost six quarters continues to be very difficult for our customers, our employees and our suppliers.
But I am proud to say that we have been able to continue to improve our performance in most aspects despite the challenging environment and the recent contract wins in both platform drilling and Wireline are a testament to the strong operational performance and the resilience of Archer’s workforce. As announced at the end of last year following the closing off the transaction in North America we changed our organization into Eastern Hemisphere and Western Hemisphere. And the financial reporting has now been aligned with this new structure.
For clarification Eastern Hemisphere includes all businesses previously reported under the North Sea and E&P reporting segments; namely Platform Drilling, Engineering, Wireline and Oiltools, while Western Hemisphere includes the former Latin American reporting segments and our North American Frac Valve division.
As mentioned previously our 42% ownership participation of Quintana Energy Services LP is reported as investment in associated companies. As initiated in the fourth quarter 2015 we continue to report our corporate costs separately. And for ease of reference we have provided the historical comparison for the last six quarters in the appendix of the earnings release.
First quarter revenue from continuing operations of $229.2 million fell 19% sequentially. While the corresponding first quarter EBITDA $19.9 million increased by $8.2 million compared to the last quarter. Mainly driven by improved results in Latin America, compared to the same period in 2015 first quarter revenue from continuing operations dropped 42% and EBITDA reduced by 70% as a consequence of the challenging market conditions.
Excluding the cancellation fee for Archer Emerald recorded in Q1 2015 revenue reduced by 36%, our EBITDA reduced 33%. First quarter 2016 revenue from an Eastern Hemisphere was $126.1 million, a decrease of $15.6 million or 11% compared to the previous quarter with the further reduction of drilling activity in platform drilling across all markets we operate in.
Compared to the same period last year revenue decreased $94.9 million or 43% and excluding the cancellation fee for Archer Emerald recorded in the first quarter 2015, a $59.3 million or 32% with lower revenue in platform drilling as the number of operating platforms reduced by over 30% compared to last year.
In addition, revenue for our Engineering Services reduced by over 50% as customers curtailed most investments in drilling facilities and are deferring maintenance work to preserve cash flow. Revenue in Oiltools reduced by 33% with the combination of lower activity in the Gulf of Mexico and Australia. Pricing pressure across all markets and adverse currency effects related to the Norwegian Kroner and the British Pounds.
Revenue in our Wireline division increased slightly compared to the same period last year with higher reimbursable billings and the slightly increased activity in the North Sea mainly related to well maintenance and P&A campaigns.
Western Hemisphere reported revenue of $103.1 million, a decrease of $37.7 million or close to 27% compared to the previous quarter. The reduction is primarily driven by the devaluation of the Argentinian peso versus the U.S. dollar which lost over 30% of its value compared to the fourth quarter impacting our first quarter revenue by approximately $31 million.
In addition, revenue was further negatively impacted by lower activity levels in the South of Argentina, as most of our rigs were on standby, which also impacted activity levels for our solids control and fluids business. This was partly offset by the start up of a third rig in Bolivia as well as the last of the new rigs in the Neuquén area.
Revenue from our North American Frac Valve business reduced by 25% sequentially, which was below the reduction of rig count with a lower volume of new valves sold as well as reduced repair and part sales as customers continue to curtail the spend. Compared to the same period last year revenue declined by $71.7 million or 41% reflecting mainly the devaluation of the Argentinian peso versus the U.S. dollar by approximately 35%, which impacted revenue by over $60 million.
In addition, revenue was negatively impacted by reduced activity in the South of Argentina as well as in the Neuquén area, as customers reduced drilling activity and idled predominantly older rigs and requested price decreases. These negative effects were partially offset by incremental revenue from our newly commissioned rigs with all six rigs working at the end of the quarter.
Year-on-year revenue for Frac Valves decreased by almost 77%, a reflection of the challenging market conditions in the United States. First quarter earnings before interest, taxes, depreciation, and amortization or EBITDA of $19.9 million increased by $8.2 million, compared to the previous quarter and is $45.3 million below the level reported in the same period last year.
Excluding the cancellation fee for Archer Emerald recorded in Q1 2015, EBITDA decreased by $9.7 million or 33%. First quarter EBITDA in Eastern Hemisphere were $14 million, a decrease of $7.7 million or 36% compared to the fourth quarter as a result of the lower revenue as well as increased restructuring costs in platform drilling in order to adjust our cost base in line with the lower activity levels.
Wireline decreased by $3.2 million or 69.6% following lower activity levels as well as start up costs for our joint venture in Saudi Arabia and the absence of provision releases accounted for during the fourth quarter 2015..
EBITDA in Oiltools also decreased sequentially by $1.8 million or 50.2% as a result of an unfavorable product mix, increased facility costs, and the absence of provision releases accounted for in the fourth quarter 2015. This was partly offset by improvements in Engineering Services or EBITDA improved by $0.4 million compared to last quarter. As we managed to adjust our headcount in line with activity levels leading to overall improved personnel utilization.
Compared to the first quarter 2015, Eastern Hemisphere EBITDA decreased by $42.5 million and $6.9 million or 33% excluding the cancellation fee for Archer Emerald. Significantly reduce operating activity and platform drilling, engineering and Oiltools combined with additional restructuring expenses as well as pricing pressure negatively impacted results partially offset by cost savings achieved since the first quarter last year.
EBITDA in the Western Hemisphere amounted to $8.8 million, an increase of $15.3 million compared to the fourth quarter, mainly as a result of lower restructuring costs, improved margins from higher activity in Bolivia combined with lower third-party costs in the South of Argentina as activity levels in the first two months of the quarters were very low.
Compared to the same quarter last year, EBITDA declined by $3.8 million or 30%. EBITDA in land drilling decreased by $2 million or 15.5%, mainly as a result of the lower activity in pricing levels in all regions combined with significant restructuring costs to adjust the workforce in line with these reduced levels.
This was partially offset by margins earned from the newly commissioned rigs in the Neuquén area as well as the absence of operating losses related to an operations and management contract with a major customer, incurred during first quarter 2015. Year-on-year EBITDA in our North American Frac Valves division reduced by $1.8 million with significantly curtailed activity levels and strong pricing pressure partly offset by cost savings achieved since the beginning of last year.
As a consequence of the deterioration in market conditions in Q1 2016 and in particular the depressed pricing levels we recorded an impairment amounting to $5.5 million relating to the inventory in this division, as the net realizable value was lower than the value we carried in our books.
Now turning to Archer as a whole, corporate costs in the first quarter 2016 totaled $2.9 million and were 17% lower compared to the fourth quarter 2015 and 22% lower compared to the same quarter last year. As you made further adjustments to our corporate structure following the divestiture of our North American Well Services business. As mentioned at the end of last year, we reiterate our guidance that we expect the total annual corporate costs in 2016 to reduce by approximately 20% compared to the full-year 2015.
Net Financial items were a net expense of $20.3 million in the first quarter 2016 compared to an expense of $24.1 million in the fourth quarter 2015. Interest expenses increased to $15.1 million compared to $12.2 million in the fourth quarter as margins increased in line with the agreed changes to our revolving credit facility at the end of last year.
Other financial items amounted to $13.6 million gain compared to a $7.2 million expense in the fourth quarter 2015. Other financial items represent predominantly exchange gains or losses on an intercompany loan denominated in Norwegian Kroner following the strengthening of the Norwegian Kroner against U.S. dollar at the end of the quarter.
Losses derived from results in associated companies amounted to $19.5 million in the first quarter 2016 compared to $1.2 million in the fourth quarter 2015 and represent predominantly the results of our 42% ownership interest in Quintana Energy Services, which includes Archer divested North America Well Services business.
The combined company suffered significant losses during the first quarter due to the strong headwinds in the North American land market. As rig count dropped another 34% during the first quarter 2016 and ended at a historical level. This was combined with one-time costs incurred to integrate the businesses and to reduce the cost structure.
On the positive side, I want to comment the management team of QES for taking the right steps quickly as we manage to achieve the planned synergies head of time and ended the quarter with a lower than planned net interest bearing debt. As we expect the North American market to remain difficult in the short-term we will continue to work closely with our partners to find solutions to further reduce costs and retain the value of our investments in the long-term.
Depreciation of $17.9 million for the first quarter was flat compared to the previous quarter. Losses related to discontinued operations, which represent costs related to the divested North American Well Services business $90 million to $1.2 million and represent mainly severance costs and the provision for lease costs related to facilities which will no longer be used and are being marketed.
Including all items mentioned before, plus tax expenses of $2.9 million we reported total net loss of $27.8 million or $0.48 per share. Total net interest-bearing debt at the end of the quarter was $809 million compared to $782.1 million as of December 31, 2015. This increase is mainly attributable to the capitalization of a joint venture in the month of March and the strengthening of the Norwegian Kroner at the end of the quarter. As part of our loan facilities are denominated in that currency.
Cash and cash equivalents excluding restricted cash amounted to $23.1 million on March 31, 2016 compared to $20.5 million as of December 31, 2015. During the quarter we contributed an amount of $12 million into our new joint venture in Saudi Arabia and as of March 31, 2016 this amount was treated as restricted cash as the registration process was not fully completed at the end of the quarter.
Capital expenditures for continuing operations during the quarter amounted to $1.8 million, representing predominantly capital spent necessary to maintain or enhance our existing assets. Our guidance for capital expenditures of $20 million to $30 million for the full-year remains unchanged and includes capital expenditures which will be made by our new joint venture in Saudi Arabia. As the joint venture has been fully financed during the first quarter, we do not expect that it will require any additional financing in the coming years.
In addition, it includes some expenditures which are contingent on further contract wins as well as expenditures to replace or extend the life of our existing asset fleet. As mentioned in our earnings release, we are in compliance with all covenants at the end of the quarter.
As agreed with our lenders at the end of last year, we will reduce the amount available under our multicurrency revolving facility to $625 million and we will reduce our overdraft facilities to $41.7 million each in the month of May. Also in the month of May, Seadrill Limited will provide a new subordinated debt amounting to $75 million, which will allow us to reduce the amount available of our revolving and overdraft credit facilities.
We will continue to focus on things we can control. The delivery of superior service quality and a strong safety record combined with innovative ways to reduce the overall costs for our customers. We will also continue to adjust our cost structure in line with lower activity levels and to reduce the effect from continues pressure on pricing, as well as a result. We will have to take the unfortunate steps to further adjust our workforce in the second quarter by another 8% to 10%. Lastly and most importantly, we will maintain our focus on cash, which means disciplined capital management and relentless focus on working capital.
With this, I will turn the call over to John.
Okay. Thank you, Christoph and good morning or good afternoon ladies and gentlemen. I am excited by my appointment as CEO as announced this morning, so my excitement is tempered by the reality of the continued oilfield market deterioration despite the recent improvement in oil price. As Archer has done over the past few years, our response and strategy to this environment will be to continue to focus on our core values of safety, integrity, and performance.
I am extremely encouraged to see that even in the current market environment and declining activity, our safety performance and service quality continue to improve and are recognized by operators across all areas and which are very positive reflection for the dedication and quality of our personnel.
Let’s now move on to comments on the first quarter operational performance, and discuss the outlook for the second quarter, and finally open it up for Q&A. Starting with Eastern Hemisphere, overall activity and platform drilling increased as two platforms went from active to maintenance mode in the UK and despite a full quarter contribution of the seventh platform Talisman contract award from November 2015.
Across the board operators continue to reduce their requirements for additional personnel equipment contributing to the decrease in overall activity. Activity for platform drilling in the second quarter will continue to decrease as additional platforms are forecast to go from active to maintenance mode in Norway and in the UK and reductions in workforce continue to adjust to forecast activity levels.
Additionally, demobilization of Archer Topaz modular rig will be complete during the quarter. The Topaz story is one of the world class performance as the crew and MDR delivered above and beyond original contract work scope delivering additional P&A services as well as the sidetrack well and has scheduled and below AFE. The sidetrack actual well time versus depth curve just shy of a perfect well timing.
Activity increased overall on Oiltools with LOCK installations, and tubing-conveyed perforating, perfwash and wellbore clean activity. The wellbore cleanup revenue dropped as compared to Q4 related to the sale of equipment in that quarter. Activity in the second quarter is expected to remain flat overall with reductions in Australia due to seasonal activity and the end of the contract offset by increases in the Far East and North Sea as well as seasonal uptick in the Gulf of Mexico.
We also expect to see continued uptick in building activity for our tubing conveyed perforating, perfwash and wellbore cleanup services as operators increasingly recognized their proven value. Activity in Wireline decreased due to lower activity in North Sea and Europe and due to the seasonal reductions in Far East. Activity for the second quarter forecast to be essentially flat with increased activity in the Far East coming out of the monsoon season offset by lower activity at the end of the quarter due to by annual maintenance shutdown of platforms in Norwegian sector.
Engineering activity decreased due to lower activity levels mainly in Norway and broadly reflecting the ongoing market condition that continue to drive cancellation or delay of larger projects. Second quarter activity is expected to remain broadly flat. Though the prolonged downturn is resulting in an increase of short-term critical managed type projects and we are focused on capturing this low margin, but increasing volume work with a very flexible and fit for purpose methodology.
Frankly, Western Hemisphere activity in Latin America declined during the quarter primarily due to an extended vacation period by one of our key customers. Productions included idling one drilling and 10 service rigs primarily in the southern region of Argentina. And we currently have 27% of our rig fleet idle.
Additionally, we ceased operating four points on drilling rates. The activity reductions in Argentina were partially offset by increased activity in Bolivia. During the quarter, we continued our workforce reduction and moving 250 operational staff in Argentina. For the reduction of operations staff are necessary to balance the workforce to current activity levels. We expect second quarter activity to increase as the majority of which previously on stand by in South of Argentina are returning to work.
For Frac Valve divisions, challenging market conditions United States land market resulted in significant production of new valve sold and a reduction in after sales services. We expect the U.S. rig count continue to drop during the second quarter, however Frac Valve activity should remain broadly flat.
Many of our customers decided further reduced their spending levels for the year 2016 during the first quarter. We forecast that these reductions and activity and a pressure on pricing will impact our business during the second quarter as well and expect this to continue at least over the remainder of 2016.
In line with the expected further reduction in activity levels mainly in Argentina, Norway, and UK, we do plan to further reduce the headcount by approximately 8% to 10% in the second quarter as driven by activity. We may see a slight recovery in activities towards the end of 2016. We do not require significant investments and are resulting from operator ability to take advantage of the low cost environment.
In the meantime, we will continue to focus on items we can't control in line with our values. We start to provide safe operations, the superior service quality and a high level of integrity. In addition, we'll continue to focus on our cost structure and work closely with our customers to find ways to reduce the overall cost of operation. The recent contract wins in North Sea are proof of our ability to provide innovative approach with a high level of service quality and to customers recognizing this value.
So with that, I will hand the call over to the operator for Q&A session. Thank you, Hanna. Will you please open the line for questions?
Certainly. [Operator Instructions] There are no questions from the telephone.
It is excellent if there is no question, it means we have done an excellent job. So I'll leave you the opportunity to ask a question and if not we’ll finish the call.
End of Q&A
[Operator Instructions] There are no questions from the telephone.
Okay. Well thank you. We appreciate everyone joining us for this afternoon’s call and for the quarter and we look forward to speaking to you next quarter. Have a good day.
Now, that will conclude today’s conference call. Thank you for your participation ladies and gentleman. You may now disconnect.
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