Weatherford International plc — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated financial statements; dollars in millions unless otherwise stated.
Business context and results
Weatherford provides oilfield products and services across more than 100 countries, organized into five reportable segments: North America, MENA/Asia Pacific, Europe/SSA/Russia, Latin America, and Land Drilling Rigs. Results were pressured by lower oil prices, reduced customer spending, weaker activity, and pricing pressure.
- Q3 revenue: $2,237, down 42% from $3,877 a year earlier. Nine-month revenue: $7,421, down 34% from $11,184.
- Q3 attributable net loss: $170, or $0.22 per diluted share, versus income of $77, or $0.10 per share, in Q3 2014. Nine-month attributable net loss: $777, or $1.00 per diluted share, versus a loss of $109, or $0.14 per share.
- Operating result and margin: Q3 operating loss was $98 (about -4.4% of revenue), compared with operating income of $318 in Q3 2014. Nine-month operating loss was $512 (about -6.9%), versus operating income of $473.
- Q3 segment operating income was $80, down 86%. North America reported a $54 operating loss; Latin America generated $73 of segment operating income. For the nine months, North America had a $156 segment operating loss, while Latin America generated $247.
- Cash flow: Nine-month operating cash flow was $383, versus $379 in 2014. Capital expenditures were $542 versus $1,045; operating cash flow less capital expenditures was approximately negative $159, compared with negative $666 in 2014. Cash increased $45 to $519.
- Margins and cost pressure: Product and service costs were $1,869 in Q3 against revenue of $2,237; the filing reports no standalone gross-margin measure. Depreciation and amortization was $298 in Q3 and $925 for nine months.
Financial position and material changes
- At September 30, cash was $519; current assets were $6,515 and current liabilities $4,025 (current ratio approximately 1.62). Working capital was $2,490, down from $3,917 at year-end 2014.
- Total debt was approximately $7,704: $1,684 short-term/current maturities and $6,020 long-term, compared with $7,525 at December 31, 2014. Cash less total debt implies net debt of approximately $7,185. Short-term and current debt rose from $727 at year-end.
- The $2.25 billion revolving credit agreement had $1,195 available, and Weatherford was in compliance with its debt-to-total-capitalization covenant (51.9% versus a maximum below 60%). The agreement matures in July 2017.
- Revenue fell across all segments in Q3. North America declined 55%, MENA/Asia Pacific 30%, Europe/SSA/Russia 35%, Latin America 29%, and Land Drilling Rigs 35%. The North American rig count was down 54% from Q3 2014; international rig count was down 16%.
- Comprehensive loss attributable to Weatherford was $527 in Q3 and $1,343 for nine months, including currency translation losses of $359 and $589, respectively. Shareholders’ equity declined to $5,754 from $7,033 at year-end 2014.
Outlook, unusual items, and risks
- Management expected North America to face further activity declines in Q4, partly offset by cost reductions. Latin America and Sub-Sahara Africa were expected to weaken further; MENA/North Africa and Russia were expected to remain relatively resilient, with Q4 broadly flat versus Q3. No specific revenue or earnings guidance was provided.
- 2015 capital expenditures were projected at approximately $650. Management reported a targeted workforce reduction of 14,000; 11,000 reductions were completed by September 30, with expected annualized savings of $803. More facility closures were planned through year-end and early 2016.
- Management said longer-term prospects for core businesses were favorable, while noting results depend on pricing, activity, cost control, and technology adoption. Remaining Land Drilling Rigs were intended for divestiture, with proceeds expected to reduce or repurchase debt.
- Q3 included $49 of restructuring charges, $44 of Iraq project losses, $26 of currency devaluation charges, and $17 of long-lived asset and related charges. Nine-month items included $159 of restructuring, $112 of litigation charges, $71 of project losses, $68 of currency devaluation charges, $208 of long-lived asset and related charges, and $20 of equity-investment impairment.
- Estimated total losses on the Iraq early-production-facility projects were $450 at September 30; recognized project losses were $71 for the first nine months. Contract claims and change orders not meeting recognition criteria were excluded from revenue.
- Weatherford paid $120 into escrow in August to settle the Freedman securities class action; court approval and a final hearing scheduled for November 3, 2015 remained pending at the filing date. Government investigations concerning prior tax-control weaknesses and restatements continued; the company said outcomes and potential losses could not be predicted.
- Currency devaluations and foreign exchange exposure were material: nine-month devaluation charges included $36 for the Angolan kwanza, $26 for the Venezuelan bolivar, and $6 for the Kazakhstani tenge. Credit ratings were investment grade but had negative outlooks from S&P, Moody’s, and Fitch.
- Other risks included high indebtedness, potential asset impairments, customer spending and commodity-price volatility, tax examinations, and $725 of outstanding letters of credit and performance or bid bonds that could be called under specified conditions.
Most important facts for investors to verify
- Whether the steep revenue and operating-performance declines stabilized after Q3, especially in North America, and whether cost reductions offset ongoing pricing and volume pressure.
- Execution and realized cash savings from the expanded 14,000-position workforce-reduction plan and planned facility closures.
- Liquidity and refinancing capacity, including near-term maturities, commercial-paper access, credit-agreement availability, and compliance with debt covenants.
- Final court approval and payment treatment of the $120 Freedman settlement, and developments in ongoing government investigations and other litigation.
- Changes in estimated losses and cash requirements for the Iraq projects, and further currency losses or asset impairments.