Archer Ltd.'s (ARHVF) CEO John Lechner on Q2 2016 Results - Earnings Call Transcript

| About: ARCHER LTD (ARHVF)
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Archer Ltd. (OTCPK:ARHVF) Q2 2016 Earnings Conference Call July 29, 2016 8:00 AM ET

Executives

John Lechner - CEO

Dag Skindlo - CFO

Analysts

Operator

Good day and welcome to the Archer Second Quarter 2016 Results Presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Lechner. Please go ahead.

John Lechner

Thank you, Steffie. Good morning - or good afternoon, ladies and gentlemen, and thank you for joining us for Archer's second quarter 2016 earnings call. Today's call is being hosted from Stavanger, Norway, where I'm joined by Dag Skindlo, our Chief Financial Officer. Before I start, please note that the information provided in today's call includes forward-looking statements, as well as non-GAAP financial measures. A detailed disclaimer was included in today's earnings release.

I'm extremely pleased that our overall QHSE [ph] performance continues to improve, despite the decline in activity, compared to the first quarter. This is only possible due to the diligence of our employees and their constant focus on our core values of safety, integrity and performance. Such sustained improvement in HSE and quality best positions Archer in the current market as well as for future activity.

I will now touch briefly on the quarter activity before handing it over to Dag to present financial highlights. I'll then comment on the market outlook before wrapping up with an opportunity for questions.

Our overall headcount was reduced 5% during the quarter as we continue to closely match resources to activity requirements. In the Western Hemisphere, we experienced higher activity in Latin America during the second quarter, with a major operator restarting after a shutdown in the first quarter. Though activity remains significantly down from 2015 levels, in the U.S., an increase in new valve sales positively impacted Archer's Practo business while our Quintana Energy Services joint venture saw activity revenue increasing at the end of the quarter.

Moving on to the Eastern Hemisphere, platform drilling activity decreased during the quarter, as our Archer Topaz modular drilling rig demobilized after a highly successful campaign and another platform transitioned from active to maintenance mode. While we offset a restart of a platform that had commenced maintenance stop at the end of the first quarter.

Our Wireline division started the quarter with news of the award of a five-year contract, but was then impacted by a planned, biannual maintenance shutdown of the North Sea field, offset by higher activity in European, Asian, and African markets. Lower overall activity negatively impacted our Oil Tools revenue and profitability, with lower activity in Europe and Australia only partially offset by higher activity in North America.

Finally, our Drilling Facility Engineering and Survey Inspection business increased revenue and profitability during the quarter through a combination of tighter personnel utilization in the North Sea and cost-saving initiatives probably offset by lower survey and inspection activity in Australia.

I will now hand over to Dag for his comments.

Dag Skindlo

Thank you, John. As you all know, business fundamentals have deteriorate across the board in the second quarter as a result of the low oil price during the year. Most of our customers have announced significant cuts to their 2016 expenditures, with North American E&P companies announcing reductions in annual spend of approximately 50% and internationally recovery [ph], about 20%.

This continues to impact our revenue in our second quarter. It was reduced by 4.5% from first quarter and down 23% from Q4 last year. We continue to focus on the things we can control in this market; restate our foot, refocus, restructuring, and cost cutting. Hire employees [ph], disciplined CapEx, reduced cash tied up working capital or disfocused later.

Overall, revenue for second quarter was $218.8 million, compared to $229.2 million for the first quarter, a reduction of $10.4 million, or 4.5%, mainly involving reduced activity from platforms really in the North Sea. Second quarter revenue for Western Hemisphere was $105.7 million, up to a $0.5 million of land drilling activity in Latin America, as mentioned by John. Second quarter revenue for Eastern Hemisphere was $113.1 million, a decrease of $12.9 million, or 10.2% sequentially following reduced spending by our customers in line due to lower oil price.

Land drilling has mostly impacted in Q2 by a further $0.5 million reduction in revenue as customers in the North Sea continued to cut drilling operations, combined with a demobilization of the [indiscernible] as previously mentioned.

As we said before, restructuring costs was $17.5 million for the quarter. It enabled us to achieve a margin of 8% before restructuring costs shows that we are able to cut costs in line with reduced activity. It positioned us well to take advantage of an upsetting in the market.

Debt restructuring costs was $19.1 million, mainly related to restructuring of the land drilling business in Argentina. Restructuring costs in June included also a $12.1 million provision for costs related to reducing personnel in Argentina, which has come as a result a reduction in client activity. Including Q4 of 2015, we have already reduced our headcount in Argentina by 596 employees, which has been at a significant cost. Overall, EBITDA after restructuring and onetime costs was a loss of $1.6 million in the quarter.

Net financial items were a net expense of $22.9 million in the quarter as follows; interest expense amounted to $13.3 million compared to $15.1 million in the first quarter; losses derived from results in associated companies amounted to $13.3 million in the second quarter compared to $19.5 in the first quarter. And represent predominantly a result of our $42 million ownership in Quintana Energy Services, which continued to set significant losses due to the continued weakness of the North American land market.

Over the last two months seen increased activity but the visibility is short. We continue to work with our partners to see how to best maintain value through the cycle. Interest expenses and losses from associated companies was partly offset by all the items which we extended. The depreciation in the quarter was $19.1 million and it was mostly done from first quarter. Again, overall, Q2 net loss growth was reported at $45.2 million, or $0.78 per share.

Our main financial focus is to generate cash flow from our operations to service our debt obligation and I am pleased to report that we have generated $33 from underlying operations to finance new activities and servicing of debt in the second quarter mainly related from the previously working capital. Our KPI for cash generated from underlying operations to finance activities and servicing of debt is the reported EBITDA adjusted for changes in working capital and tax payments - taxes paid.

To highlight the receivable inventory and other transactions have been reduced by $64 million since the end of last year. Furthermore, total net interest bearing debts end of June was $790.7 million compared to $809 million at the end of March. Also important, total unrestricted cash and committed undrawn credit line amounted to $89.5 million at the end of June, which gives us sufficient cash to manage going forward.

Capital expenditures in the quarter amounted to $1.6 million, representing predominantly capital spends necessary to maintain or enhance our existing assets. We are doing this significantly reduced CapEx much quicker the spin and improved utilization of existing assets.

In line with that, we have reduced the guidance from net capital expenditures to between $6 million and $10 million for the year, down from our previous guidance of $20 million to $30 million. In additional, [indiscernible] auction joint venture in Saudi Arabia as these was fully financed during the first quarter. We do not expect the talk to Archer will require any additional financing in the next coming years.

Furthermore, based on the current assessments of our business and markets, we expect to be compliant to our financial covenant through Q1 2017. In order to maintain - in order to find a solution for the periods thereafter, we continue to maintain a closed dialogue with our lenders and other key stakeholders.

With this I turn it back to John.

John Lechner

Thank you, Dag. During the first half of the year, many of our customers decided to further reduce their spending levels for 2016. However, we are starting to see signs of improvement and activity levels and expect activity to improve toward the end of the year, in line with other well service companies' views. They are currently working diligently in preparation for the fourth quarter investment on incremental platform drilling operations for oil [ph]. However, we expect third quarter 2016 revenue to be lower than our second quarter due to continued reduction in drilling activities related to platform shutdowns and also vacations in some of the markets where we operate.

In response, as I mentioned, we continue to reduce our cost base and carefully review our capital expenditures. We will also continue our focus on our safety, integrity, and performance values so as to further improve our service delivery.

With that, I'll hand the call over to the operator for a Q&A session. Thank you, Steffie. Can you open the line for questions?

Question-and-Answer Session

Operator

John Lechner

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

Operator:

Thank you, ladies and gentlemen. This will conclude today's conference call.

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