Acquisitions Of Wellbore Fishing & Rental Tools And Iceland Drilling Will Strengthen Earnings

Key Takeaways

• Strategic acquisitions and increased ownership are set to enhance revenue, net margins, and financial consolidation, supported by strong investor confidence.
  
• Projected revenue growth and reduced leverage could improve earnings, interest costs, and support future dividend distribution plans.
  
• Integration and leverage risks from acquisitions, coupled with reliance on the volatile oil and gas sector, could affect Archer's financial performance and growth stability.

Catalysts

Provides various oilfield products and services to the oil and gas industry in Norway, Argentina, the United Kingdom, and internationally.

• The acquisition of Wellbore Fishing & Rental Tools is expected to provide significant EBITDA and cash flow synergies, potentially boosting Archer's revenue and enhancing net margins by expanding service offerings and leveraging existing relationships.
  
• Archer's increase in ownership in Iceland Drilling allows for financial consolidation, which could improve revenue recognition and overall earnings.
  
• The successful equity raise and oversubscription indicate strong investor confidence, supporting potential stock price appreciation and allowing for future refinancing at better terms, which may improve net margin through reduced interest expenses.
  
• The projected pro forma revenue growth of nearly 20% annually since 2022, driven by strategic acquisitions and organic growth, is likely to lead to substantial increases in earnings and cash flow.
  
• Expectations for reduced leverage and increased cash flow capacity position Archer favorably for refinancing initiatives in 2025, potentially enhancing earnings by reducing interest costs and supporting dividend distribution plans.

Archer Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Archer's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $57.1 million (and earnings per share of $0.92) by about February 2028, up from $1.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 186.5x today. This future PE is greater than the current PE for the GB Energy Services industry at 7.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.14%, as per the Simply Wall St company report.

Archer Future Earnings Per Share Growth

Risks

• The acquisition of Wellbore Fishing & Rental Tools involves integration risks, which could impact the expected synergies and the financial performance of the combined entity, potentially affecting net margins.
  
• The pro forma leverage ratio remains relatively high, suggesting that Archer might face challenges in reducing debt quickly, which could impact earnings due to higher interest expenses.
  
• Although the acquisition was financed through a private placement with no immediate value dilution, the increased share count could dilute earnings per share unless the acquisition delivers the expected value and cash flows.
  
• The company's reliance on acquisitions for growth could increase operational risk if market conditions or integration processes do not develop favorably, potentially affecting revenue and cash flow stability.
  
• The company operates in the oil and gas sector, which remains susceptible to fluctuations in commodity prices and regulatory challenges, posing a risk to future revenue streams and profitability.

Valuation

• The analysts have a consensus price target of NOK40.333 for Archer based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK45.0, and the most bearish reporting a price target of just NOK34.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $57.1 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of NOK27.45, the analyst price target of NOK40.33 is 31.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.