Business context and reporting period
Weatherford International plc’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019. The oilfield-services company operates in more than 80 countries, reporting Western Hemisphere and Eastern Hemisphere segments. The filing is presented under Chapter 11 debtor-in-possession accounting.
Weatherford and certain affiliates filed for Chapter 11 on July 1, 2019. The bankruptcy court confirmed the amended reorganization plan on September 11, but the company had not yet emerged as of September 30. Irish examinership and Bermuda proceedings were also ongoing.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,314 | $1,444 | $3,969 | $4,315 |
| Operating income (loss) | $(447) | $(13) | $(866) | $(125) |
| Net loss attributable to Weatherford | $(821) | $(199) | $(1,618) | $(708) |
| Loss per share, basic and diluted | $(0.82) | $(0.20) | $(1.61) | $(0.71) |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $(679) | $(347) |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $177 | $141 |
Q3 segment operating income was $71 million, or approximately 5.4% of revenue, versus $116 million, or 8.0%, a year earlier. Nine-month segment operating income was $139 million, compared with $225 million. These segment figures exclude corporate costs and significant separate charges.
At September 30, cash and cash equivalents were $676 million and restricted cash was $374 million. Current assets were $3.924 billion and current liabilities were $3.380 billion. DIP financing was $1.386 billion; a further $305 million was outstanding under the A&R Credit Agreement. Separately, $7.634 billion of prepetition notes and accrued interest was classified as liabilities subject to compromise. Shareholders’ deficiency was $5.224 billion.
Cash, cash equivalents and restricted cash totaled $1.050 billion at period-end. Nine-month investing activities provided $210 million, primarily reflecting $319 million of business-sale proceeds, while financing activities provided $917 million, principally from DIP borrowings. Cash used in operations increased to $679 million from $347 million, with working-capital needs, restructuring-related payments and bankruptcy professional fees among the drivers.
Material changes versus prior comparable periods
- Revenue fell 9% in Q3 and 8% for the nine-month period. Management attributed the declines to weaker U.S. and Canadian activity, Argentina uncertainty, and businesses divested since 2018. Excluding the divested businesses, revenue was down 2% in Q3 and 1% year to date.
- Q3 operating results included a $399 million goodwill impairment; nine-month results included $730 million of goodwill impairment, which eliminated the remaining goodwill balance. The company also recorded $303 million of reorganization items in Q3 and $86 million of prepetition charges year to date.
- Interest expense was lower—$26 million in Q3 and $341 million year to date—partly because contractual interest on prepetition unsecured notes was no longer accrued after the Chapter 11 filing. Q3 unrecognized contractual interest was $133 million.
- Business disposals generated $319 million of cash proceeds during the first nine months. The company sold its laboratory services and surface data logging businesses for aggregate consideration of $256 million and completed further land-rig divestitures.
Outlook, risks and unusual items
Management expected North American E&P spending to decline by high-single-digit to low-double-digit percentages in 2019 versus 2018, with subdued Canadian activity potentially persisting through 2020. It anticipated stable North Sea activity, seasonal declines in Russia, and growth in core Middle East operations, while noting regional results would be affected by divestitures. Management described industry pricing as likely to remain at a “medium-for-longer” level.
2019 capital expenditures were projected at approximately $250 million, subject to activity and liquidity. The transformation program’s targeted $1 billion of incremental adjusted earnings versus 2017 was delayed beyond its original year-end 2019 target; management cited market headwinds and higher manufacturing-footprint rationalization costs.
The confirmed plan contemplated cancellation of existing unsecured notes in exchange for 99% of reorganized-company shares, up to $2.1 billion of 11% exit notes (up to $1.6 billion in rights-offering notes and $500 million in takeback notes), and cancellation of existing equity in exchange for 1% of new shares and four-year warrants to purchase 10%, subject to dilution. Planned exit financing was expected to repay DIP and A&R borrowings. These transactions remained subject to completion and applicable proceedings.
Management stated that industry conditions and bankruptcy-related risks raised substantial doubt about the company’s ability to continue as a going concern. It expected DIP financing to provide liquidity during the cases but cautioned that successful completion of the transaction and future liquidity were not assured. Other risks included slower customer collections, supplier pressure on payment terms and credit limits, employee retention, market cyclicality, litigation and contingent obligations. The NYSE had suspended trading and pursued delisting; shares traded OTC under WFTIQ.
Notable contingencies include $38 million accrued for litigation and settlements and a $24 million liability for expected penalties under a minimum-purchase commitment. The filing also reports a GAMCO shareholder securities lawsuit; management said outcomes of certain litigation could not be reliably predicted.
Most important facts for investors to verify
- Whether and when the confirmed restructuring plan, Irish scheme and Bermuda proceedings were completed, and the final terms of emergence financing and reorganized equity.
- Actual unrestricted liquidity and cash burn, including the availability and use of restricted cash, factoring proceeds, and compliance with the DIP minimum-liquidity covenant.
- The final allowed amount and treatment of the $7.634 billion of liabilities subject to compromise, and the resulting recovery and dilution for existing shareholders.
- Whether operating performance, customer collections and transformation savings improved against management’s outlook, particularly in North America and Argentina.
- Developments in litigation, purchase commitments, listing status and any subsequent events affecting going-concern assumptions.