Oilfield Margins Will Suffer But Value Will Persist

Key Takeaways

• Archer's core market faces pressure from the global shift to renewables, raising long-term risks for revenue growth and capital access.
  
• Dependence on key clients and rising digital automation may erode margins, amplifying challenges to sustained profitability.
  
• Rising renewable energy trends, environmental scrutiny, technology gaps, and competition threaten Archer's growth, profitability, and stability in both established and volatile markets.

Catalysts

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

• While Archer is positioned to benefit from continued investment in maximizing output from existing oil & gas infrastructure and the growing global demand for energy, the long-term transition towards renewable energy sources and decarbonization could ultimately erode the company's core market and put pressure on future revenue growth.
  
• Despite Archer's expansion into higher-margin, technology-driven well services and success in winning long-term P&A and decommissioning contracts, increasing automation and digital disruption across industries may eventually surpass Archer's current technological capabilities, weighing on its ability to defend or expand net margins.
  
• Although Archer has demonstrated resilience through business cycles and reduced financial leverage, its historical reliance on a limited set of large clients raises customer concentration risk, making future earnings and cash flow more vulnerable if key contracts are lost or not renewed.
  
• While Archer's strategic shift to focus on brownfield, P&A, and decommissioning services positions it to capture a growing share of late-life oilfield activity over the next decade, the increasing adoption of automation and integrated digital solutions by clients could squeeze margins and lead to industry overcapacity, thereby constraining Archer's long-term profitability.
  
• Even as Archer's commitment to debt reduction and improved capital structure is lowering interest expense and supporting current dividend payments, heightened ESG scrutiny and the global pivot away from fossil fuels may restrict future access to capital and limit Archer's ability to invest for growth, potentially impacting earnings and free cash flow over time.

Archer Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Archer compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Archer's revenue will grow by 9.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.9% today to 5.6% in 3 years time.
• The bearish analysts expect earnings to reach $83.0 million (and earnings per share of $0.92) by about July 2028, up from $-44.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.1x on those 2028 earnings, up from -4.8x today. This future PE is lower than the current PE for the GB Energy Services industry at 8.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.32%, as per the Simply Wall St company report.

Archer Future Earnings Per Share Growth

Risks

• Archer's long-term growth is closely linked to oil and gas brownfield and well intervention markets, which remain exposed to the global transition towards renewable energy and decarbonization efforts, potentially leading to lower demand for traditional oilfield services and impacting both top-line revenue and long-term earnings growth.
  
• Heightened environmental scrutiny and growing ESG obligations could restrict Archer's access to capital markets, driving up financing costs and limiting the company's ability to invest in technology and M&A, ultimately putting pressure on net margins and future cash flow.
  
• The company's exposure to Argentina brings significant country-specific risks; the area experienced a $75 million annual revenue cut and 500 layoffs, and future volatility or economic uncertainty in Argentina could cause abrupt swings in revenue and operational margin.
  
• The shift in the oilfield sector towards increased automation, digitalization, and integrated in-house solutions by major clients may outpace Archer's current technology investments, risking loss of competitive positioning and resulting in price pressure that would depress margins and overall earnings.
  
• Intensifying competition from global giants such as Schlumberger, Halliburton, and Baker Hughes, combined with Archer's customer concentration risk and dependence on a limited set of large contract wins, could lead to revenue volatility and margin compression if any major contracts are lost or not renewed.

Valuation

• The assumed bearish price target for Archer is NOK34.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Archer's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $83.0 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of NOK23.9, the bearish analyst price target of NOK34.0 is 29.7% 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.