Weatherford International plc — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Weatherford provides oilfield equipment and services through Western Hemisphere and Eastern Hemisphere segments.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $1.423 billion | $1.386 billion; up 3% |
| Operating loss | $39 million | $214 million loss; operating margin improved to -2.7% from -15.4% |
| Net loss attributable to Weatherford | $245 million; $0.25 per diluted share | $448 million; $0.45 per diluted share |
| Operating cash flow | -$185 million | -$179 million |
| Cash and cash equivalents | $459 million at March 31 | $613 million at December 31, 2017 |
| Debt | $7.792 billion total debt; approximately $7.333 billion net of cash | Total debt comprises $153 million current and $7.639 billion long-term |
| Liquidity and equity | $744 million available under credit agreements; shareholders’ equity was negative $898 million | Current assets $3.615 billion; current liabilities $2.092 billion |
Products revenue declined to $501 million from $511 million; services revenue increased to $922 million from $875 million. Segment operating results improved to income of $24 million in the Western Hemisphere and $16 million in the Eastern Hemisphere, versus losses of $30 million and $59 million, respectively, in Q1 2017. Depreciation and amortization fell to $147 million from $208 million.
Material changes, outlook and commentary
- Revenue increased 3% in both hemispheres. Management attributed Western Hemisphere growth to U.S. activity and demand in Argentina and Mexico; Eastern Hemisphere growth reflected contract gains and higher activity in the Middle East and Russia.
- Management expects 2018 Western Hemisphere growth from completion systems, artificial lift and drilling services, particularly in the Permian. It anticipates growth in the North Sea and Gulf Cooperation Council countries and increased activity in Russia; several other regions are expected to remain stable. The filing provides no full-year revenue or earnings guidance.
- 2018 capital expenditures were projected at $200–$250 million, excluding the land-rig business. Management expected liquidity needs to be funded by cash, operating cash generation, credit availability, receivables factoring and asset disposals.
- A transformation program expected to continue through 2019 targets workforce and organizational changes, facility consolidation and operating efficiencies. Charges were $25 million in Q1 2018 versus $75 million in Q1 2017.
- Weatherford issued $600 million of 9.875% senior notes due 2025 and used proceeds in part to repay 2018 notes and tender for 2019 notes. The tender retired $425 million face value; the remaining 2019 notes were repaid in April 2018. Q1 included a $34 million bond tender and call loss. Interest expense increased to $149 million from $141 million.
- Other significant items included a $46 million warrant fair-value gain (versus a $62 million loss in Q1 2017) and $26 million of currency devaluation charges, primarily related to Angola. These items affected comparisons of reported losses.
- The company acquired the remaining 50% of its Qatar joint venture for stated total consideration of $87 million and sold its Canadian continuous sucker rod service business for $25 million. It continued plans to divest its land drilling rigs business.
Risks and contingencies
- High indebtedness, ongoing operating cash outflows, negative shareholders’ equity and below-investment-grade credit ratings with negative outlooks are key financial risks. The company reported compliance with its credit covenants at March 31, 2018 and expected continued compliance based on current projections.
- Management cited sensitivity to oil and gas prices, customer spending, activity levels, currency movements, access to capital, execution of transformation and divestiture plans, and potential asset impairments.
- Litigation includes U.S. and Canadian patent disputes. Several U.S. patent claims were found invalid by the PTAB, subject to appeal; a Canadian patent was found invalid, also subject to appeal. The company cautioned that adverse outcomes could be material. Accrued litigation and settlements were $47 million.
- The company recorded $47 million of liabilities for expected penalties under minimum-purchase commitments. It also had $487 million of letters of credit and performance and bid bonds outstanding, plus $15 million of surety bonds, which could reduce liquidity if called.
- Q1 operating cash use included interest and restructuring payments. The company sold $96 million of receivables through factoring for $93 million in cash proceeds.
Investor verification points
- Track whether revenue growth converts into sustained positive operating cash flow and operating profitability.
- Review debt maturities, refinancing costs, covenant headroom, liquidity and the impact of the April 2018 note repayment.
- Assess progress and cash costs of the transformation plan and land-rig divestiture, including use of any proceeds.
- Monitor oilfield activity and pricing by region, foreign-exchange exposure—especially Angolan kwanza—and the warrant’s potentially dilutive terms.
- Follow patent appeals, other litigation and purchase-commitment liabilities for changes in potential exposure.