Weatherford International plc — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited U.S. GAAP results; dollars in millions except per-share amounts.
Business context and reporting period
Weatherford provides oilfield products and services across more than 100 countries. It reorganized reporting in Q1 2015 into five segments: North America, MENA/Asia Pacific, Europe/SSA/Russia, Latin America, and Land Drilling Rigs; prior-period segment data was recast. Results were pressured by lower customer spending and pricing amid weak oil prices and declining rig counts.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2,390 | $3,711 | $5,184 | $7,307 |
| Operating income (loss) | $(464) | $25 | $(414) | $155 |
| Net loss attributable to Weatherford | $(489) | $(145) | $(607) | $(186) |
| Loss per share, diluted | $(0.63) | $(0.19) | $(0.78) | $(0.24) |
| Operating cash flow | Not separately presented | Not separately presented | $249 | $29 |
| Capital expenditures | Not separately presented | Not separately presented | $411 | $662 |
- Q2 operating margin was approximately negative 19.4%, versus positive 0.7% a year earlier; six-month operating margin was approximately negative 8.0%, versus positive 2.1%.
- Six-month operating cash flow less capital expenditures was negative $162 million, compared with negative $633 million in 2014. Cash increased to $611 million from $474 million at year-end 2014.
- At June 30, total debt was $7.824 billion ($1.556 billion current and $6.268 billion long-term), versus $7.525 billion at year-end. Current assets were $7.064 billion and current liabilities $4.137 billion. The current ratio was approximately 1.71.
- Net interest expense was $117 million in Q2 and $237 million for the first half. Six-month depreciation and amortization was $627 million.
- The $2.25 billion revolving credit agreement was extended to July 13, 2017. Availability was $1.306 billion; the company reported compliance with its debt-to-total-capitalization covenant, which requires a ratio below 60%.
Material changes versus the prior comparable period
- Revenue fell 36% in Q2 and 29% in the first half. Q2 segment revenue declined across all segments: North America fell 51%, MENA/Asia Pacific 11%, Europe/SSA/Russia 25%, Latin America 11%, and Land Drilling Rigs 53%.
- North American results were particularly affected by reduced activity and pricing pressure; average North American rig count was down 52% from June 2014. International rig count was down 13% over the same comparison.
- Q2 operating results included $181 million of long-lived asset impairment and related charges, $20 million of equity-investment impairment, $69 million of restructuring charges, and $112 million of litigation charges. Q2 2014 included $143 million of long-lived asset impairment and $125 million of goodwill impairment.
- Cash from operations improved year over year, reflecting working-capital improvement and the absence of the $253 million government settlement payments made in 2014; lower business activity remained an offset.
Outlook, commentary, risks and unusual items
- Management expected North America to remain affected by curtailed activity, with only modest improvement in the second half of 2015. International activity was expected to be relatively flat versus Q2, with Gulf-market growth offset by Asia Pacific declines.
- Management projected 2015 capital expenditures of approximately $750 million. It planned to use operating cash, credit facilities, commercial paper, and potential asset-sale proceeds to meet cash needs, including debt service.
- The workforce-reduction target was raised to 11,000 positions. Approximately 97% of the prior 10,000-position target had been completed by June 30, with stated annualized savings of $686 million. More facility closures were planned.
- Weatherford intended to divest its remaining land drilling rigs and expected any proceeds to be used for debt repayment or repurchases. It reported negative outlooks from S&P, Moody’s, and Fitch; it warned that a negative rating change could reduce commercial-paper capacity.
- The company recorded a $124 million impairment of North American pressure-pumping assets amid lower utilization, plus $37 million of related charges. It also recorded $20 million of equity-investment impairment. Estimated total losses on the Iraq early-production-facility projects were $406 million at June 30; related claims and change orders were subject to recognition criteria.
- A securities class-action settlement required $120 million of payments, subject to court approval and other conditions; $95 million was accrued in Q2. Other litigation and ongoing government investigations could result in additional material costs, though outcomes and loss ranges were not predictable.
- Currency exposure included $16 million of Q2 charges from an approximately 11% Angolan kwanza devaluation and $26 million of Venezuela remeasurement charges in Q1. Management was also monitoring inflation and currency conditions in Argentina.
- Management stated that disclosure controls were effective at June 30, 2015, and reported no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether revenue, pricing, and activity stabilize as projected, especially in North America, and whether cost actions deliver the expected savings.
- Cash conversion and working-capital trends, capital spending versus the $750 million plan, and the company’s ability to fund debt maturities and interest.
- Credit ratings, commercial-paper access, revolving-credit availability, and compliance with the debt covenant.
- Final costs and timing for the Iraq projects, including the $406 million estimated total losses and any unapproved claims or change orders.
- Approval and payment status of the $120 million securities settlement, and developments in other litigation and government investigations.
- Execution and proceeds of planned divestitures, including the remaining land drilling rigs, and whether proceeds are applied to debt reduction.