Weatherford International plc — Q1 2017 Form 10-Q
Business context and reporting period: The filing covers the three months ended March 31, 2017. Weatherford provides oilfield products and services across approximately 90 countries, with reporting segments in North America, MENA/Asia Pacific, Europe/SSA/Russia, Latin America and Land Drilling Rigs. Results continued to reflect reduced customer spending and pricing pressure amid a volatile, contracted energy-services market.
Financial performance
| Metric (USD millions, except per-share data) | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1,386 | $1,585 |
| Operating loss | $(196) | $(447) |
| Net loss attributable to Weatherford | $(448) | $(498) |
| Loss per diluted share | $(0.45) | $(0.61) |
| Net cash used in operating activities | $(179) | $(203) |
- Revenue declined 13% year over year. North America revenue fell 10%, MENA/Asia Pacific 11%, Europe/SSA/Russia 5%, Latin America 21%, and Land Drilling Rigs 25%.
- Operating loss improved by $251 million. Management attributed the improvement mainly to cost reductions, the shutdown of U.S. pressure pumping operations, and the absence of the $52 million Zubair project loss recorded in Q1 2016.
- Interest expense rose to $141 million from $115 million, primarily due to higher average debt and interest rates. A $62 million warrant fair-value loss also affected Q1 2017; the warrant liability rose to $218 million from $156 million.
- Cash and cash equivalents were $546 million at March 31, down from $1.037 billion at year-end. Investing cash use was $279 million, including $240 million to purchase previously leased pressure-pumping equipment; financing cash use was $36 million.
- Total debt was approximately $7.54 billion, comprising $240 million of short-term borrowings and current maturities and $7.299 billion of long-term debt. Shareholders’ equity was $1.691 billion. Current assets were $5.106 billion and current liabilities $2.447 billion.
- Capital expenditures were $40 million in the quarter. The company projected approximately $250 million of 2017 capital expenditures, excluding the $240 million equipment purchase.
Material changes, outlook and risks
- On March 24, Weatherford agreed to contribute specified North American pressure-pumping, multistage-completions and pump-down-perforating businesses to the OneStim joint venture with Schlumberger. Weatherford expects to own 30%, Schlumberger 70%, and receive a one-time $535 million cash payment at closing. Closing was expected in the second half of 2017, subject to approvals and other conditions. Related assets and liabilities were classified as held for sale.
- Management expected North American growth in 2017, supported by higher rig counts and demand in selected product lines; MENA growth from market-share gains; increased activity in Russia; stable European activity; and subdued Latin American activity. It expected no near-term improvement in deepwater markets in Sub-Saharan Africa and Asia Pacific. No numerical revenue or earnings guidance was provided.
- The company reported compliance with its credit-facility financial covenants at March 31. On April 17, it amended its credit agreements, including covenant and definition changes, and reduced revolving commitments from $1.38 billion to $1.199 billion. At quarter-end, stated borrowing availability was $1.315 billion, including the effects of facility usage and letters of credit.
- Credit ratings were B with negative outlook at S&P and Caa1 with negative outlook at Moody’s for senior unsecured debt. Management identified high indebtedness, limited capital-market access, oil and gas price volatility, customer spending, foreign-exchange constraints and execution of dispositions among key risks.
- Cash requirements included interest and debt payments, severance, working capital and SEC settlement payments. Of the $140 million SEC penalty, $60 million remained due in two $30 million installments in May and September 2017. The company also disclosed $146 million of cash denominated in Angolan kwanza and restrictions on U.S.-dollar conversion.
- Other notable exposures include cumulative estimated losses of $532 million on Iraq early-production-facility contracts; litigation matters with potentially material outcomes; and $155 million in liabilities for losses on supply-contract minimum purchase commitments, including $65 million to be contributed to OneStim.
Most important facts for investors to verify
- Whether OneStim closed on the expected terms and timing, and whether the $535 million proceeds were received and used as anticipated.
- Liquidity and covenant compliance after the April 17 credit amendments, including upcoming debt maturities and the July 2017 maturity of commitments from non-extending revolving-credit lenders.
- Progress in reducing operating cash outflows and achieving the projected 2017 capital-spending plan amid continuing revenue and pricing pressure.
- Payment timing for the remaining SEC penalty installments and developments in material litigation, tax examinations and other contingencies.
- Potential effects of the warrant’s 84.5 million-share exercise feature, exercisable at $6.43 per share through May 21, 2019, and its fair-value changes on earnings and dilution.