Weatherford International plc — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Weatherford is a global oilfield-services and equipment provider operating in about 90 countries.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $5.749 billion | $9.433 billion |
| Gross profit / margin | $560 million / 9.7% | $1.412 billion / 15.0% |
| Operating loss / margin | $2.251 billion / (39.2%) | $1.546 billion / (16.4%) |
| Net loss attributable to Weatherford | $3.392 billion; $3.82 per diluted share | $1.985 billion; $2.55 per diluted share |
| Cash from operations | $(314) million | $706 million |
| Capital expenditures | $204 million | $682 million |
| Cash and cash equivalents | $1.037 billion | $467 million |
| Total debt, including current maturities | $7.582 billion | $7.434 billion |
| Total shareholders’ equity | $2.068 billion | $4.365 billion |
Operating cash flow less capital expenditures was approximately negative $518 million in 2016. Year-end cash less total debt was approximately $6.545 billion net debt. The current ratio was about 2.0, compared with 1.4 in 2015. The company reported $1.317 billion available under its credit agreements and compliance with debt covenants at year-end.
Fourth-quarter revenue was $1.406 billion and net loss attributable to Weatherford was $549 million, or $0.59 per share. Formation Evaluation and Well Construction generated 57% of 2016 revenue, Completion and Production 36%, and Land Drilling Rigs 7%.
Material changes versus the prior year
- Revenue fell 39%, with declines across all segments amid lower customer spending, activity and pricing. North America revenue fell 46%; international revenue fell 34%; Land Drilling Rigs revenue fell 41%.
- Operating loss widened by $705 million. The company recorded about $1.5 billion of impairment, restructuring, litigation, inventory and pressure-pumping-related charges.
- Operating cash flow swung from positive $706 million to negative $314 million. Capital expenditures fell by $478 million.
- Net loss increased by $1.407 billion, including a $496 million income-tax expense despite a pretax loss, primarily reflecting valuation allowances on deferred tax assets and other tax items.
- Debt increased modestly overall, while cash rose by $570 million, primarily reflecting financing transactions. The company raised about $3.7 billion from debt offerings and a secured term loan, repurchased about $1.87 billion principal amount of notes, and issued 200 million ordinary shares for approximately $1.1 billion in proceeds.
Outlook, commentary and notable items
- Management said the industry downturn likely bottomed in the third quarter of 2016 and described recovery as modest. For 2017, it expected North American growth, improvement in the Middle East and North Africa, increased activity in Russia, stable Europe, and subdued Latin America; it did not expect near-term improvement in deepwater Sub-Sahara Africa and Asia Pacific.
- Management projected 2017 capital expenditures of approximately $250 million, excluding a $240 million January 2017 purchase of leased pressure-pumping equipment. It expected liquidity needs to be funded by cash, operations, credit availability, factoring and potential asset-sale proceeds.
- The U.S. pressure-pumping business was shut down and its assets idled in November 2016; management intended to sell or partner the business. The company also intended to divest its remaining land-rig business when conditions improved. Completion, timing and proceeds were uncertain.
- Long-term Iraq early-production contracts carried cumulative estimated losses of $532 million. A 2016 Zubair settlement provided for $150 million gross; $134 million had been collected by year-end, with the remaining $16 million collected in January 2017.
- Weatherford accepted a $120 million PDVSA note for receivables, recognized an $84 million fair-value loss, then sold the economic rights for $44 million and recognized an $8 million gain. Latin America represented 38% of year-end net receivables; Venezuela, Ecuador and Mexico comprised 43%, 16% and 10% of that regional balance.
- A $140 million SEC civil penalty resolved an investigation into historical tax-accounting controls and restatements. The company paid $50 million in 2016 and $30 million in January 2017; $90 million remained payable at year-end. It also agreed to provide tax-control reports and certifications to the SEC for two years.
- Credit ratings were below investment grade with negative outlooks, and the company had lost access to the commercial-paper market. The filing identifies refinancing, covenant, interest-cost and funding risks. Cash included $120 million denominated in Angolan kwanza, subject to limits on U.S.-dollar conversion and repatriation.
- Other material risks include commodity-price and customer-spending volatility, competitive pricing pressure, geopolitical and currency exposure, customer credit and collection risk, further asset impairments, litigation, and regulatory and environmental changes. The company paid no cash dividends and did not expect to resume them in the near term.
Important facts for investors to verify
- Debt maturities, interest costs and covenant headroom, especially the 2017 revolver maturities and the large 2021 debt maturities; also verify ongoing access to financing.
- Whether operations can return to positive operating cash flow and improve margins without relying on asset sales, receivables factoring or new financing.
- Actual progress and proceeds from the planned pressure-pumping and land-rig divestitures, and the terms and cost of the January 2017 equipment purchase.
- Receivables quality and collection exposure in Latin America, including any further developments involving PDVSA and Angolan cash conversion.
- Whether the $532 million estimated Iraq contract losses or other project estimates, impairment assumptions and deferred-tax-asset allowances require further charges.
- Settlement payments, remaining litigation exposure and required SEC tax-control reporting. The filing reports an unqualified audit opinion and effective internal control over financial reporting as of year-end.