Archer 2023 Annual Report Archer 2023 Annual Report
16 17
Board of Directors’ Report
Risk factors
Risks Relating to the Group and the Industry in which the
Group Operates
The Group’s business depends on the development and
production of oil and gas in the North Sea and internationally
The Group’s business depends on the level of activity of oil and
gas exploration, development, production, and decommissioning
in the North Sea and internationally, and in particular, the level
of exploration, development, production, and decommissioning
expenditures of the Group’s customers. The North Sea is a mature
oil and natural gas production region that has experienced
substantial seismic survey and exploration activity for many years.
Because a large number of oil and natural gas prospects in this
region have already been drilled, additional prospects of sufficient
size and quality could be more difficult to identify in the future. The
decrease in the size of oil and natural gas prospects and a decrease
in production may result in reduced drilling activity in the North Sea.
As a significant portion of the Group’s business is conducted in the
North Sea, such decrease may reduce the demand for the Group’s
services, which would adversely affect the Group’s business, results
of operations, cash flows, financial condition and prospects. Further,
although the pace and magnitude of the demand for a shift from
hydrocarbons to renewable energy sources is uncertain and
difficult to predict, such energy transition could lead to a decline in
the demand for the Group’s services and thus negatively affect the
Group, and there can be no assurance that the Group will be able
to successfully adapt to such energy transition.
The Group’s business is significantly dependent on the level of
oil and gas prices
The demand for the Group’s drilling and well services is adversely
affected by declines in exploration, development and production
activity associated with depressed oil and natural gas prices.
Historically, oil and gas prices have been highly volatile and subject
to large fluctuations in response to relatively minor changes in
the supply of and demand for oil and gas, market uncertainty
and a variety of other economic and political factors, as seen in
connection with the COVID-19 pandemic and the war in Ukraine.
The Group may fail to keep pace with technological changes
The Group provides drilling and well services in increasingly
challenging onshore and offshore environments. To meet its
clients’ needs, the Group must continually develop new, and
update existing, technology for the services it provides, primarily
in the Group’s well services division. In addition, rapid and
frequent technology and market demand changes can render
existing technologies obsolete, requiring substantial new capital
expenditures, and could have a negative impact on the Group’s
market share. For instance, the Group’s Well Service divisions
have developed proprietary technologies. In the event that the
Group is unable to develop these technologies further in line with
the general market for competing technologies, the Group may
experience a material decrease in the demand for its technology,
which in turn could have a material adverse effect on the Group’s
operations, profitability and prospects.
The Group’s industry is highly competitive
The Group’s industry is highly competitive. The Group’s contracts are
traditionally awarded on a competitive bid basis, with pricing often
being the primary factor in determining which qualified contractor
is awarded a job, although each contractor’s technical capability,
product and service quality and availability, responsiveness,
experience, safety performance record and reputation for quality
can also be key factors in the determination.
Several other oilfield service companies are larger than the Group
and have resources that are significantly greater than the Group’s
resources. Furthermore, the Group competes with several smaller
companies capable of competing effectively on a regional or local
basis. These competitors may be able to better withstand industry
downturns, compete on the basis of price, and acquire and
implement new equipment and technologies. Should the Group
not be able to compete effectively, this could adversely affect the
Group’s revenues and profitability.
The Group’s Argentina operations could be affected by
government action
The Group’s land drilling division provides drilling and workover
services to operators in Argentina, and these operations account
for approximately 25-30% of the Group’s total revenues. Argentina’s
has in the past defaulted on its sovereign debt, and from time to time
imposed capital restrictions, both leading to a challenging situation
for the oil and gas sector in the country, including the oil service
industry. How the government of Argentina invests in the energy
sector, makes changes to employment and labour legislation, and
formulates policy around taxation, currency control and exchange,
national debt repayment and commodity pricing could all have a
significant effect on the Group’s business in Argentina.
Currently, the Argentinean government has imposed strict capital
controls, including restrictions on payment to related parties for
services rendered. This restricts payment from Argentinean Archer
entities to non-Argentinean Archer entities using the official foreign
exchange market rates. Until these capital controls are lifted, Archer
cannot freely utilise cash generated from its Argentinean operation
to support the rest of the Group’s activity.
A small number of customers account for a significant portion of
the Group’s total operating revenues
The Group derives a significant amount of its total operating
revenues from a few energy companies. In the year ended, 31
December 2023, Equinor, Pan American and YPF accounted for
approximately 45.3%, 18.0% and 7.8% of the Group’s total operating
revenues, respectively. During the year ended 31 December 2022,
contracts from Equinor, Pan American Energy and YPF accounted
for 47.6%, 18.8% and 8.6% of the Group’s total operating revenues,
respectively. Consequently, the Group’s financial condition and
results of operations will be materially adversely affected if these
customers interrupt or curtail their activities, terminate their
contracts with the Group, fail to renew their existing contracts or
refuse to award new contracts to the Group, and the Group is unable
to enter into contracts with new customers at comparable day
rates. As such, the loss of any significant customer could adversely
affect the Group’s financial condition and results of operations.
An oversupply of comparable rigs in the geographic markets in
which the Group competes could depress the utilisation rates
and day rates for its rigs
Utilisation rates, which are the number of days a rig actually works
divided by the number of days the rig is available for work, and day
rates, which are the contract prices customers pay for rigs per day,
are also affected by the total supply of comparable rigs available for
service in the geographic markets in which the Group competes.
Improvements in demand in a geographic market may cause the
Group’s competitors to respond by moving competing rigs into
the market, thus intensifying price competition. Significant new
rig construction could also intensify price competition. In the past,
there have been prolonged periods of rig oversupply with corre-
spondingly depressed utilisation rates and day rates largely due to
earlier, speculative construction of new rigs. Improvements in day
rates and expectations of longer-term, sustained improvements in
utilisation rates and day rates for drilling rigs may lead to construc-
tion of new rigs. Furthermore, these increases in the supply of rigs
could also depress the utilisation rates and day rates for the Group’s
modular rigs and thus materially reduce the Group’s revenues and
profitability for this segment. The Group’s land drilling operations
in Argentina are particularly exposed to the aforementioned risks.
The Group will experience reduced profitability if its customers
reduce activity levels or terminate or seek to renegotiate their
contracts with the Group
Currently, the Group’s drilling services contracts with major
customers are largely day rate contracts, pursuant to which the
Group charges a fixed charge per day regardless of the number of
days needed to drill the well. Likewise, under the Group’s current
well services contracts, the Group charges a fixed daily fee. During
depressed market conditions, a customer may no longer need
services that are currently under contract or may be able to obtain
comparable services at a lower daily rate. As a result, customers
may seek to renegotiate the terms of their existing platform
drilling contracts with the Group or avoid their obligations under
such contracts. In addition, the Group’s customers may have the
right to terminate, or may seek to renegotiate, existing contracts
if the Group experiences downtime, operational problems above
the contractual limit or safety-related issues or in other specified
circumstances, which include events beyond the control of either
party.
Exploration and production operations involve numerous
operational risks and hazards
Substantially all the Group’s operations are subject to hazards that
are customary for exploration and production activity, including
blowouts, reservoir damage, loss of well control, cratering, oil
and gas well fires and explosions, natural disasters, pollution and
mechanical failure. Any of these risks could result in damage to
or destruction of drilling equipment, personal injury and property
damage, suspension of operations, or environmental damage.
Risks relating to cyberattacks
The Group relies heavily on technology and data systems in order
to conduct its operations. The Group’s software, technology, data,
websites or networks, as well as those of third parties, are vulnerable
to security breaches, including unauthorised access, computer
viruses or other cyber threats that could have a security impact.
Although the Group has implemented security systems, the Group
may not be able to prevent cyber-attacks, such as phishing and
hacking, or prevent breaches caused by employee error, in a timely
manner or at all. If such events occur, unauthorised persons may
access or manipulate confidential and proprietary information
of the Group, destroy or cause interruptions in the Group’s data
systems which in turn could adversely hamper the Group’s
ability to execute projects and otherwise conduct its business.
Consequently, cyber-attacks or breaches negatively affecting the
Group’s data systems could have a material adverse effect on the
Group’s business, financial condition and results of operations.
