Weatherford International Plc annual report, FY2019

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Weatherford International plc — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Weatherford provides separate Predecessor results through December 13 and Successor results from December 14 after emergence from Chapter 11; Fresh Start Accounting makes the periods not directly comparable. Annual comparisons below use the company’s combined 2019 presentation where indicated.

Business context

Weatherford supplies equipment and services for drilling, evaluation, completions, production and intervention of oil and gas wells. It operates in more than 80 countries and reports Western Hemisphere and Eastern Hemisphere segments. Its shares were quoted on OTC Pink as WFTLF after NYSE trading was suspended in May 2019; the company said its appeal was pending.

Financial highlights

  • Revenue: Combined 2019 revenue was approximately $5.215 billion, down $529 million, or 9%, from $5.744 billion in 2018. Excluding revenue from divested businesses, the decline was 3%. Western Hemisphere revenue fell 11%; Eastern Hemisphere revenue fell 8% overall, but grew 5% excluding divestitures.
  • Profit and operating performance: Combined operating loss was approximately $1.181 billion, compared with a $2.084 billion loss in 2018. The apparent improvement largely reflected lower goodwill impairments and bankruptcy-related accounting; segment operating income fell 41% to $194 million. Combined net income attributable to Weatherford was approximately $3.635 billion, primarily reflecting the bankruptcy reorganization gain rather than recurring operations.
  • Unusual charges and credits: The Predecessor recorded $5.389 billion of net reorganization items, including a $4.297 billion gain on settlement of liabilities subject to compromise and $1.434 billion of Fresh Start valuation adjustments, offset in part by fees and other charges. It also recorded $730 million of goodwill impairment, $189 million of restructuring charges, and $374 million of inventory write-offs, asset impairments and other charges. The 2018 goodwill impairment was $1.917 billion.
  • Cash flow: Combined operating cash flow was approximately negative $686 million ($747 million used in the Predecessor period, partly offset by $61 million provided in the Successor period). Investing cash flow was approximately positive $135 million and financing cash flow positive $747 million. Full-year capital expenditures were $270 million across the two reporting periods.
  • Liquidity: Year-end cash and cash equivalents were $618 million; restricted cash was $182 million, for total cash and restricted cash of $800 million. Available liquidity was approximately $850 million, including cash and ABL availability. The company had no ABL borrowings at year-end.
  • Debt: Year-end long-term debt was $2.151 billion, plus $13 million of short-term borrowings and current debt. The new Exit Notes had $2.1 billion aggregate principal, an 11% coupon and a December 2024 maturity; annual interest payments were expected to be approximately $231 million. The former $7.6 billion of unsecured senior and exchangeable notes was cancelled in the reorganization.
  • Other balance-sheet metrics: Total assets were $7.293 billion and shareholders’ equity was $2.916 billion at year-end, following Fresh Start Accounting. These balances are not directly comparable with 2018. The company reported $399 million of letters of credit and performance and bid bonds outstanding, including $152 million of cash collateral for certain letters of credit.

Material changes versus prior comparable period

  • Revenue declined 9% year over year, reflecting weaker North American activity, customer budget reductions in Argentina, and divestitures; Middle East, Russia and North Sea activity partly offset declines.
  • Segment operating income declined from $327 million in 2018 to $194 million in combined 2019. Management cited lower activity, unfavorable product mix in Canada and the U.S., project start-up costs and delayed cost savings.
  • Operations entered a substantially different capital structure after emergence on December 13, 2019. The company adopted Fresh Start Accounting, reset accumulated deficit to zero and recorded assets and liabilities at fair value, creating a new reporting entity.
  • Weatherford sold its laboratory services and surface data logging businesses in April 2019 for aggregate consideration of $256 million and completed divestitures of land drilling rig operations for aggregate stated proceeds of $288 million.

Outlook, risks and contingencies

  • 2020 outlook: Management said the COVID-19 pandemic and OPEC-related supply developments had sharply weakened oil prices and customer demand, creating significant uncertainty. It was implementing more aggressive cost and workforce reductions and remained committed to improving profitability and free cash flow, without providing numerical targets for either. Planned 2020 capital spending was $100–$150 million, subject to reduction if cash generation or liquidity proved insufficient.
  • Liquidity and debt risks: Management cautioned that liquidity and capital needs were difficult to predict and additional financing beyond committed facilities might be limited. The Exit Credit Agreements include covenants, including a $200 million minimum liquidity covenant under the LC facility; the company reported covenant compliance at year-end and expected continued compliance in 2020.
  • Industry and operating risks: Results depend on volatile commodity prices and customer capital spending. The filing also highlights customer collection and credit risks, supplier terms, international and foreign-exchange exposure, competition, severe weather, public-health disruption, cybersecurity, environmental regulation and potential impairment charges.
  • Legal matters: The company reported ongoing claims and litigation, including shareholder litigation and investigations-related matters. It said it did not believe current litigation was likely to produce material uninsured losses, but unexpected judgments or settlements could be material. Accrued litigation and settlements were $44 million at year-end.
  • Other items: The top eight shareholders collectively held more than 80% of outstanding ordinary shares. S&P assigned a B- issuer rating with negative outlook after emergence; Moody’s assigned B1 with stable outlook. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at year-end.

Most important facts for investors to verify

  • Assess recurring operating performance separately from the $5.7 billion of net bankruptcy and Fresh Start reorganization items, and confirm how combined 2019 figures are constructed.
  • Track cash conversion, working-capital needs, receivable collections, and whether available liquidity remains adequate against the $200 million minimum liquidity covenant and interest obligations.
  • Monitor the effect of the 11% Exit Notes, covenant headroom, ratings and access to credit, as well as the timing and amount of the 2024 maturity.
  • Evaluate whether management’s cost-reduction program and $100–$150 million capital-spending plan can support positive free cash flow amid weaker demand and oil prices.
  • Confirm progress on NYSE relisting, share liquidity and ownership concentration, and review material developments in litigation, tax matters and other contingencies.