Weatherford International plc — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts are in U.S. dollars; financial figures below are in millions unless noted. Weatherford provides equipment and services to the oil and gas industry through geographic segments and its Land Drilling Rigs business.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $1,585 | $2,794 | Down 43% |
| Operating income (loss) | $(447) | $50 | Decline of $497 |
| Net loss attributable to Weatherford | $(498) | $(118) | Loss widened by $380 |
| Loss per share, basic and diluted | $(0.61) | $(0.15) | |
| Depreciation and amortization | $250 | $316 | Down $66 |
- Revenue fell across all segments: North America down 53% to $543; MENA/Asia Pacific down 32% to $361; Europe/SSA/Russia down 38% to $257; Latin America down 37% to $305; and Land Drilling Rigs down 39% to $119.
- Operating loss included $77 of restructuring charges, $67 of net litigation charges, and $49 of asset write-downs and other related charges. Excluding these items would not remove the severe underlying operating deterioration.
- Cash from operations was negative $205, versus negative $42 a year earlier. Investing cash use was $14, including $43 of capital expenditures and $30 of insurance proceeds related to a rig loss. Financing provided $250, including $630 of net proceeds from issuing 115 million ordinary shares, offset in part by debt repayments.
- Cash was $464 at quarter-end, compared with $467 at year-end 2015. Current assets were $5,366 and current liabilities $3,478 (current ratio about 1.54).
- Total debt was approximately $7,058: $1,212 of short-term borrowings and current maturities plus $5,846 of long-term debt. Net debt was approximately $6,594. The company reported $949 available under its $2.0 billion revolving credit agreement and compliance with its then-current debt-to-capitalization covenant.
- Segment operating results ranged from a $128 loss in North America, $46 loss in MENA/Asia Pacific, and $1 loss in Europe/SSA/Russia to $44 income in Latin America; Land Drilling Rigs recorded a $26 loss.
Changes, outlook and management commentary
- Management attributed the 43% revenue decline and operating deterioration to the sharp fall in oilfield activity and customer pricing pressure. Average North American rig count was down 57% and international rig count down 19% from Q1 2015.
- Management expected market conditions to weaken further in the first half of 2016, with a possible slight recovery in the second half if commodity prices stabilized and seasonal activity improved. It expected North America to remain particularly weak, while the Eastern Hemisphere might improve earlier.
- The 2016 cost plan included a 6,000-person workforce reduction, substantially completed by March 31; management added a further targeted reduction of 2,000 employees, expected by midyear. The company also planned to close nine manufacturing and service facilities and more than 50 operating and non-operating facilities during 2016; four and more than 25, respectively, had been closed in Q1.
- 2016 capital expenditures were projected at approximately $250, about 63% below 2015. Management said liquidity sources were expected to meet requirements, but also cited possible debt repayments, interest, severance, working capital, and litigation payments as cash needs.
- On May 4, 2016, after quarter-end, Weatherford entered into a $1.15 billion amended revolving facility and a $500 million secured term loan. The new agreements introduce leverage, leverage-and-letters-of-credit, and asset-coverage covenants; specified maturity terms depend in part on lender extensions and repayment or refinancing of at least $500 million of 2019 notes.
Unusual items, risks and contingencies
- Weatherford recognized a $52 estimated loss in Q1 on its Zubair early-production-facility contract in Iraq; total estimated losses on the projects were $584 at March 31. Project estimates included $116 of claims revenue, with no additional claims revenue added in Q1; unapproved claims and change orders were excluded from revenue.
- The company recorded a $65 accrual related to ongoing SEC discussions concerning prior financial-statement restatements and investigations. It said settlement was uncertain, actual loss could exceed the accrual, and unresolved proceedings could result in litigation or material penalties.
- The filing reports a $101 income-tax amount, but the statements and accompanying text are not consistent in describing its sign: the statements show a $592 pretax loss and $491 net loss, while the note describes a $101 tax benefit. Verify the underlying tax presentation.
- Other exposures include a pending appeal in shareholder derivative litigation, other claims and employment litigation, $96 of contractual residual-value guarantees, and $156 of supply-contract minimum-purchase commitments. Weatherford said adverse outcomes in certain matters could be material.
- Cash included $139 denominated in Angolan kwanza. Angola’s restrictions on U.S.-dollar conversions could limit repatriation and increase foreign-exchange exposure. The company also reported $764 of letters of credit and performance or bid bonds outstanding.
- Credit ratings had negative outlooks: S&P BB+ for senior unsecured debt, Moody’s Ba3, and Fitch BB. The filing identifies high indebtedness, commodity prices, customer spending, liquidity and access to capital, currency movements, and execution of cost reductions and divestitures as risks.
Important facts for investors to verify
- Whether revenue, activity and pricing stabilize, and whether the expected second-half recovery occurs.
- Execution and cash costs of the additional workforce reductions, facility closures, and 2016 capital-spending plan.
- Availability and covenant implications of the May 2016 credit agreements, including the secured term loan and 2019-note maturity conditions.
- Updated Zubair contract loss estimates, realization of claims, and any further litigation or SEC/DOJ settlement accruals.
- The correct income-tax benefit or expense presentation and the effect of Angola’s currency-conversion restrictions on reported and usable cash.