Weatherford International plc — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results are presented against the comparable 2016 periods; balance-sheet figures are compared with December 31, 2016. Amounts are in millions of U.S. dollars except per-share data.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,460 | $1,356 | $4,209 | $4,343 |
| Operating loss | $(64) | $(945) | $(387) | $(1,852) |
| Net loss attributable to Weatherford | $(256) | $(1,780) | $(875) | $(2,843) |
| Loss per share, basic and diluted | $(0.26) | $(1.98) | $(0.88) | $(3.27) |
| Net interest expense | $148 | $129 | $427 | $363 |
- Q3 revenue rose 8% year over year; nine-month revenue declined 3%. Products revenue was $535 million and services revenue was $925 million in Q3.
- Segment operating results improved year over year: Q3 segment operating income was $34 million versus a $111 million loss; nine-month segment operating loss narrowed to $57 million from $334 million. Consolidated operating loss remained negative after corporate and other expenses.
- Operating loss comparisons benefited substantially from the absence of large 2016 charges. Q3 2016 included $436 million of long-lived asset impairments and other significant write-downs; the first nine months of 2016 included $952 million of impairments, write-downs and other charges and $190 million of net litigation charges. No long-lived asset impairment was recorded in the first nine months of 2017.
- Operating cash flow was negative $484 million for the first nine months, compared with negative $444 million in 2016. Investing cash flow was negative $401 million, including $244 million to purchase previously leased pressure-pumping equipment; capital expenditures were $147 million. Financing provided $287 million.
- Cash and cash equivalents were $445 million at September 30, down from $1.037 billion at year-end 2016. Total debt was approximately $7.921 billion, including $391 million of short-term borrowings and current maturities and $7.530 billion of long-term debt. Shareholders’ equity was $1.384 billion.
- Current assets were $5.043 billion and current liabilities were $2.470 billion. The company reported $691 million of availability under its revolving credit and term-loan facilities and said it was in compliance with financial covenants.
Changes, outlook and management commentary
- Q3 revenue growth was led by North America, up 20% to $538 million, reflecting higher activity as the North American rig count increased. Latin America revenue fell 10% to $229 million. For the first nine months, North America grew 8%, while MENA/Asia Pacific fell 9% and Latin America fell 17%.
- Management cited higher activity, utilization, product mix and cost reductions as contributors to improved segment results. It continued restructuring: charges were $34 million in Q3 and $140 million for the first nine months of 2017.
- Management expected North American growth for the rest of 2017, with international growth prospects in the Middle East and North Africa and Russia; it expected Latin America to remain subdued and no near-term improvement in deepwater Sub-Saharan Africa and Asia Pacific. It described the industry as likely to remain at a “medium-for-longer” oil-price level, with continuing short-term fluctuations. These are directional expectations, not quantified earnings guidance.
- Weatherford planned an organizational transformation to flatten management structure, reduce costs, improve processes and supply-chain efficiency, and rationalize manufacturing. New reporting segments were expected to be introduced in Q4 2017.
- The planned OneStim joint venture with Schlumberger was expected to close in Q4 2017, subject to approvals and customary conditions. Weatherford expected a $535 million cash payment, subject to purchase-price adjustments, and a 30% interest in the venture. The filing notes that adjustments could be substantial. The company also continued to intend to divest its remaining land-drilling-rig business when market conditions improve.
- Capital spending for 2017 was projected at approximately $225 million, excluding the $244 million equipment purchase. Management expected liquidity sources to be sufficient for anticipated needs, including potential OneStim proceeds; this depends on operating cash generation, working-capital improvements, facility access and completion of dispositions.
Risks, contingencies and unusual items
- Collections from Weatherford’s largest Venezuelan customer were delayed. The company reclassified $158 million of related receivables to non-current assets and stated it believed they were collectible, while warning that worsening political or economic conditions could require material allowances or write-offs. The filing also identifies U.S. sanctions, currency controls and customer payment delays as risks.
- Cash included $118 million denominated in Angolan kwanza; exchange controls may constrain conversion and repatriation and create additional currency risk.
- Interest expense increased with higher average borrowings and rates. On October 24, 2017, S&P downgraded senior unsecured notes to B- with a negative outlook; Moody’s rating was Caa1 with a negative outlook.
- Outstanding letters of credit and performance and bid bonds totaled $471 million, with a further $59 million of surety bonds. Calls on these obligations could reduce liquidity. The company also carried $122 million of losses on minimum-purchase supply commitments.
- Litigation exposure includes a $36 million judgment in the Spitzer matter, which Weatherford was appealing, and patent litigation involving Rapid Completions and Packers Plus. A loss contingency was recorded for the patent matter; the company warned that adverse outcomes could materially affect financial position, results or cash flows. Remaining shareholder derivative claims and other disputes also remain unresolved.
- The planned OneStim contribution, other divestitures, and any related proceeds are subject to execution, approval and market risks. The company cautioned that contemplated transactions may be delayed or not completed.
- Q3 2017 included $34 million of restructuring charges, a $4 million net litigation credit, and a $7 million warrant fair-value loss. Nine-month results included a $58 million warrant fair-value gain. The 2017 tax provision was $25 million for Q3 and $75 million for nine months despite pretax losses, as losses generated no significant tax benefit and certain taxes did not directly track earnings.
Key investor verification points
- Track operating cash burn, cash balances, debt maturities, borrowing availability, covenant compliance and the impact of the negative credit-rating outlook.
- Verify OneStim closing, final purchase-price adjustments, cash proceeds and the treatment of contributed assets and liabilities.
- Monitor Venezuelan receivable collections, the $158 million non-current balance, sanctions and any required impairment or write-off.
- Assess whether North American activity and international recovery translate into sustainable revenue growth, improved pricing and positive operating cash flow.
- Follow restructuring costs and realized savings, remaining land-rig divestiture plans, supply commitments and significant litigation outcomes.