Weatherford International plc — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Weatherford provides oilfield products and services and land drilling rigs across approximately 90 countries.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.363 billion | $1.402 billion | $2.749 billion | $2.987 billion |
| Operating loss | $127 million | $460 million | $323 million | $907 million |
| Net loss attributable to Weatherford | $171 million | $565 million | $619 million | $1.063 billion |
| Loss per share | $0.17 | $0.63 | $0.63 | $1.24 |
Q2 revenue fell 3% year over year; six-month revenue fell 8%. Products revenue was $488 million and services revenue $875 million in Q2. Direct product and service costs imply gross profit of approximately $174 million (12.8% margin) for Q2 and $354 million (12.9%) for the first half; these are calculated from reported revenue and costs. Operating loss margins were approximately 9.3% and 11.7%, respectively.
Cash used in operations was $241 million in the first half, versus $339 million a year earlier. Investing cash use was $315 million, including $243 million for previously leased pressure-pumping equipment; capital expenditures were $82 million. Financing provided $99 million. Cash declined to $584 million from $1.037 billion at year-end.
At June 30, total debt was approximately $7.690 billion, including $152 million current and $7.538 billion long-term debt; total debt was approximately $7.582 billion at year-end. Cash less total debt was approximately negative $7.106 billion. Shareholders’ equity was $1.524 billion, down from $2.068 billion. Current assets were $5.047 billion and current liabilities $2.380 billion.
Changes versus prior period
- Operating losses improved substantially, helped by lower costs from North American pressure-pumping shutdowns, workforce and facility reductions, lower depreciation, and the absence of large prior-year litigation and asset charges. The year-over-year improvement should not be read as equivalent to an improvement in underlying demand.
- North America Q2 revenue rose 18% to $475 million, reflecting higher activity; excluding pressure pumping, revenue rose 37%. International revenue declined 12% in Q2, with weakness in Latin America, Asia Pacific and the Middle East. Land Drilling Rigs revenue declined 7%.
- Interest expense increased to $138 million in Q2 and $279 million in the first half, primarily due to higher average borrowings and interest rates.
- A $127 million Q2 ($65 million first-half) noncash gain from a decline in the fair value of the share warrant reduced reported losses. Weighted-average shares increased to 990 million in Q2 from 899 million.
Liquidity, outlook and material items
- The amended credit agreements provided approximately $1.126 billion of availability at June 30, with $400 million drawn under the term loan and $73 million of facility letters of credit. The $199 million of commitments from non-extending lenders matured in July 2017, reducing revolving commitments to approximately $1.0 billion. Weatherford reported covenant compliance and expected to remain compliant through year-end.
- Management projected 2017 capital expenditures of approximately $250 million, excluding the $243 million equipment purchase already made. It expected North American growth, growth in the Middle East and North Africa, and increased activity in Russia; Latin America was expected to remain subdued, with no near-term recovery expected in deepwater Sub-Saharan Africa and Asia Pacific. Management described oil prices and industry conditions as volatile and “medium-for-longer.” No specific revenue or earnings guidance was provided.
- The planned OneStim joint venture with Schlumberger, subject to approvals and customary conditions and expected to close in the second half of 2017, would contribute Weatherford’s specified North American completion and pressure-pumping assets. Weatherford expected to retain 30% ownership and receive a one-time $535 million cash payment.
- For its largest Venezuelan customer, Weatherford changed revenue accounting to reflect an implied financing arrangement. The Q2 revenue reduction included $31 million relating to prior periods and $11 million relating to Q2. It reclassified $150 million of the customer’s $153 million receivable to noncurrent assets due to collection delays; management believed the amount was fully collectible. The accounting change did not affect operating cash flow.
- The estimated cumulative loss on Iraq early-production-facility contracts remained $532 million; the filing reported no claims revenue or back charges in the current estimate. The company recorded a probable loss contingency related to Rapid Completions/Packers Plus litigation, but the amount is not clear in the filing text; an adverse outcome could be material. A $36 million judgment in the Spitzer case remained reserved and was under appeal.
- The remaining $30 million SEC settlement payment was due in September 2017. Accrued litigation and settlements were $124 million at June 30, including that obligation. Loss liabilities on minimum-purchase commitments totaled $127 million, including $58 million to be contributed to OneStim.
- Credit ratings were B with negative outlook from S&P and Caa1 with negative outlook from Moody’s. Of the $584 million cash balance, $139 million was denominated in Angolan kwanza; local restrictions on U.S. dollar conversion may limit repatriation and add currency risk.
Important facts for investors to verify
- Closing conditions, timing and net cash proceeds for OneStim, and the resulting effect on revenue, earnings and debt.
- Collections from the Venezuelan customer, including the timing and recoverability of the $150 million reclassified receivable.
- Cash burn, debt maturities and refinancing needs, post-July revolving-credit availability, and continued covenant compliance.
- Potential exposure from Rapid Completions/Packers Plus and other litigation, the Iraq contract loss estimate, and purchase-commitment liabilities.
- Whether expected activity and pricing improvements materialize, particularly in North America and international markets, and whether planned cost reductions can be sustained.