Weatherford International plc — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 14, 2018. Weatherford provides oilfield equipment and services in approximately 90 countries and reports Western and Eastern Hemisphere segments.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $5.699 billion | $5.749 billion |
| Gross profit and margin | $810 million; 14.2% | $560 million; 9.7% |
| Operating loss and margin | $2.129 billion; (37.4%) | $2.251 billion; (39.2%) |
| Net loss attributable to Weatherford | $2.813 billion; $2.84 per share | $3.392 billion; $3.82 per share |
| Cash from operating activities | $(388) million | $(304) million |
| Cash and cash equivalents | $613 million | $1.037 billion |
| Total debt, including current portion | $7.689 billion | $7.582 billion |
| Total shareholders’ equity | $(571) million | $2.068 billion |
Revenue fell 1% year over year, while operating loss narrowed 5%. Segment operating loss improved to $258 million from $569 million. Net interest expense increased 16% to $579 million. The company reported $1.664 billion in long-lived asset impairments, write-downs and other charges, including $928 million of long-lived impairments, $540 million of inventory charges and $230 million of Venezuelan receivables write-downs. The 2017 gross margin is calculated from reported gross profit; the filing does not present it as a headline annual margin.
Cash used in investing activities was $62 million, including $225 million of capital expenditures and $430 million of proceeds from the U.S. pressure-pumping and pump-down perforating asset sale. Financing activities provided $20 million. Current assets were $3.878 billion and current liabilities $2.230 billion at year-end. The company reported $890 million of borrowing availability under its credit agreements at December 31, 2017.
Material changes versus prior period
- Revenue was nearly flat against 2016, but improved 5% excluding U.S. pressure-pumping operations and the Zubair project. Western Hemisphere revenue excluding U.S. pressure pumping increased 9%; Eastern Hemisphere revenue excluding early production facility operations increased 1%.
- North American activity and utilization improved, but continued pricing pressure and lower activity in parts of Latin America, Asia and the Middle East weighed on results.
- Operating loss improved despite higher impairment and write-down charges, supported by cost reductions, better activity in some markets and a $96 million gain on the U.S. pressure-pumping asset sale.
- Cash declined by $424 million during 2017, and the company moved from positive equity of $2.068 billion to a shareholders’ deficit of $571 million, principally reflecting the annual loss.
- The company reorganized its reporting into Western and Eastern Hemisphere segments and classified most land-drilling-rig assets as held for sale, recording a $740 million write-down on those assets.
Outlook, risks and unusual items
- Outlook: Management expected 2018 Western Hemisphere growth from completion systems, artificial lift and drilling services, particularly in the Permian, and anticipated growth in the North Sea, GCC countries and Russia. Africa, Asia and Europe were expected to be broadly stable. These expectations depend on activity, pricing and market conditions.
- Costs and divestitures: A transformation program launched in late 2017 targets organizational, process, supply-chain and manufacturing efficiencies. Management intended to divest the remaining land-drilling-rig business and use proceeds for working capital or debt reduction. 2018 capital expenditure guidance was approximately $200–$250 million, excluding land-drilling-rig expenditures.
- Debt and liquidity: Debt is substantial and interest expense rose. The company was in compliance with credit and indenture covenants at year-end and expected to remain compliant in 2018, but ratings were non-investment grade with negative outlooks (S&P B-; Moody’s Caa1). The revolving credit facility matured in July 2019 and the term loan in July 2020.
- Venezuela and collections: Revenue from substantially all Venezuelan customers was changed to cash-basis accounting in the fourth quarter. Weatherford recorded a $230 million receivables charge and cited political, economic, sanctions and currency risks. The allowance for doubtful accounts rose to $329 million from $129 million.
- Other significant items: The 2017 net loss included a $86 million warrant fair-value gain and a provisional $52 million tax benefit from U.S. tax reform. The company had $1.9 billion of gross U.S. tax-loss carryforwards, substantially offset by valuation allowances. Auditors issued unqualified opinions on the financial statements and internal control; management also reported effective controls.
- Contingencies: The filing describes ongoing shareholder derivative and patent litigation, among other matters. Management said it had not accrued amounts for matters not deemed probable and reasonably estimable; an adverse outcome could nevertheless be material. The company also disclosed $239 million of uncertain tax positions, including interest and penalties, excluded from its contractual-obligations table.
- Industry risks: Results remain sensitive to oil and gas prices, customer spending and pricing, geopolitical events, foreign exchange and collection risks, competition, weather, environmental regulation, and the possibility of further asset impairments.
Important facts for investors to verify
- Whether operating cash flow and liquidity can improve enough to support debt service, interest payments and working-capital needs.
- Debt maturities, borrowing availability, covenant compliance and the effect of non-investment-grade ratings on refinancing and supplier terms.
- Progress, proceeds and timing of the planned land-rig divestiture, and whether the U.S. pressure-pumping sale proceeds were applied to debt as disclosed.
- Whether 2018 activity, pricing and cost-saving expectations were achieved, especially in the Permian, GCC, North Sea and Russia.
- Further developments in Venezuelan receivables and cash-basis revenue recognition, tax exposures and litigation contingencies.
- Potential additional impairments or inventory and credit-loss charges following the large 2017 write-downs.