Weatherford International plc — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Weatherford provides oilfield products and services through Western Hemisphere and Eastern Hemisphere segments. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,444 | $1,460 | $4,315 | $4,209 |
| Operating loss | $(13) | $(70) | $(125) | $(429) |
| Operating margin | (0.9)% | (4.8)% | (2.9)% | (10.2)% |
| Net loss attributable to Weatherford | $(199) | $(256) | $(708) | $(875) |
| Loss per share | $(0.20) | $(0.26) | $(0.71) | $(0.88) |
- Q3 revenue declined 1% year over year; nine-month revenue increased 3%. Q3 product revenue was $508 and service revenue was $936.
- Operating losses narrowed substantially, while the company remained loss-making. Segment operating income was $116 in Q3 and $225 for the first nine months, before corporate costs, restructuring and other charges.
- Net interest expense rose to $156 in Q3 and $457 for nine months, from $148 and $427, respectively, primarily due to higher average borrowings and interest rates. Nine-month results also included a $34 bond tender and call loss and $45 of currency devaluation charges.
- Cash from operations was negative $347 for nine months, compared with negative $484 in 2017. Investing cash outflow was $41, versus $401; financing provided $223. Cash declined $220 from year-end 2017 to $393. Capital expenditures were $111 for PP&E, plus $30 for assets held for sale.
- At September 30, cash was $393; current assets were $3,730 and current liabilities $2,299 (current ratio approximately 1.62). Short-term borrowings and current debt were $396; long-term debt was $7,626, for total reported debt of $8,022. Total liabilities of $10,346 exceeded assets of $8,838, leaving shareholders’ deficiency of $1,508.
Material changes and significant items
- Western Hemisphere nine-month revenue rose 5% to $2,287, supported by U.S. activity and Latin American projects. Eastern Hemisphere revenue was nearly flat at $2,028. Q3 revenue declined in both segments, partly due to Canadian activity weakness and fewer offshore projects.
- Management attributed improved segment operating results to higher U.S. and Middle East activity, product mix, lower operating costs and transformation-related efficiencies. Restructuring and transformation charges were $90 for nine months, down from $140 a year earlier.
- Long-lived asset impairments, write-downs and other charges were $159 for nine months, compared with $26 in 2017. These included $101 of land-rig impairments, $50 of rig-related asset write-downs and an $18 charge correcting an immaterial prior-period error. The error correction had no cash-flow impact.
- Weatherford issued $600 principal amount of 9.875% senior notes due 2025, and used proceeds in part to retire 2018 and 2019 notes. At September 30, credit-agreement borrowing availability was $378. The company reported covenant compliance, but facilities include maturities in 2019 and 2020 and a subsequent increase in the required current-asset coverage ratio.
- Cash flows included proceeds from receivables factoring: $284 of receivables sold for $278 cash proceeds in the first nine months. Such proceeds were classified as operating cash flows.
Outlook, risks and contingencies
- For the remainder of 2018, management expected Western Hemisphere growth from well construction, production and drilling services, with pressure from the Permian slowdown, Latin American inflation and Canadian seasonality. It expected growth in parts of the Eastern Hemisphere, while activity in Russia, Africa and Asia was expected to remain relatively stable. Management described the longer-term outlook as favorable but dependent on activity, pricing, margins and execution.
- Projected 2018 capital expenditures were $200–$250, excluding the land-rig business. Management expected liquidity from cash, operations, credit facilities, receivables factoring and asset sales to fund requirements; cash needs include debt service, working capital and transformation costs.
- The company agreed to sell specified land-rig operations to ADES for $287.5, subject to adjustments. On November 1, 2018, it reported the first closing, for Kuwait rigs, and $123 of cash proceeds. It also signed an October 18 agreement to sell its laboratory services business for $205, subject to closing conditions. Management expected divestiture proceeds to support working capital or debt reduction.
- Credit risk was elevated: S&P downgraded senior unsecured notes to CCC+ with a negative outlook on October 24, 2018; Moody’s rating was Caa1 with a negative outlook. Management cited high indebtedness, liquidity and refinancing as risks.
- The company reported $52 of cash denominated in Angolan kwanza and $45 of nine-month currency devaluation charges, primarily related to the kwanza. Argentina was deemed highly inflationary; its functional currency was changed to the U.S. dollar effective July 1, with an immaterial Q3 currency loss.
- Management identified the Europe and Sub-Sahara Africa reporting unit as at elevated goodwill impairment risk because of underperformance, depressed offshore markets and lower-than-planned margins. Potential impairment could be material and non-cash.
- Contingencies include a $47 liability for expected penalties under a minimum-purchase supply contract and litigation for which an adverse outcome could be material. Certain patent claims had been invalidated in U.S. proceedings; related Canadian litigation remained subject to appeal.
- The filing reported effective disclosure controls as of September 30, 2018, and no material change in the company’s risk-factor assessment from its latest annual report.
Key investor verification points
- Track cash burn, working-capital needs, factoring reliance and progress of announced asset sales against debt-service requirements.
- Review debt maturities, borrowing availability, covenant headroom and the effect of credit-rating downgrades on refinancing access and cost.
- Assess whether operating improvements and transformation savings persist after restructuring and impairment charges, and whether revenue and margins meet management’s outlook.
- Follow the annual goodwill impairment test, particularly for Europe and Sub-Sahara Africa, and any further land-rig write-downs.
- Confirm completion proceeds and adjustments for the ADES and laboratory-services transactions, and monitor material litigation and supply-contract contingencies.