Weatherford International plc — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2016. Weatherford provides equipment and services to the global oil and gas exploration and production industry, organized across geographic segments and including Land Drilling Rigs. The filing describes a severe downturn in customer activity and pricing.
Financial performance and liquidity
- Q3 revenue: $1.356 billion, down 39% from $2.237 billion a year earlier. Products revenue was $485 million and services revenue was $871 million.
- Q3 earnings: Operating loss was $945 million versus $98 million; net loss attributable to Weatherford was $1.780 billion versus $170 million. Diluted loss per share was $1.98 versus $0.22. The filing does not provide a clear consolidated gross-margin figure.
- Nine-month results: Revenue was $4.343 billion, down 41% from $7.421 billion. Operating loss was $1.852 billion versus $512 million, and net loss attributable to Weatherford was $2.843 billion versus $777 million. Diluted loss per share was $3.27 versus $1.00.
- Cash flow: Operating activities used $450 million in the first nine months, compared with $383 million provided in 2015. Investing activities used $104 million, including $136 million of capital expenditures; financing activities provided $563 million. Cash ended at $440 million, down from $467 million at December 31, 2015.
- Balance sheet and liquidity: Total debt, including current maturities, was approximately $7.492 billion, versus $7.434 billion at year-end 2015. Current liabilities were $2.720 billion and current assets $4.598 billion. The revolving facility had $989 million available; the company reported compliance with its financial covenants.
- Funding and capital: Weatherford issued $623 million of ordinary shares and issued exchangeable and senior notes and a secured term loan during 2016. It repurchased $1.869 billion face value of senior notes in a tender offer, recording a $78 million loss. Outstanding shares increased to 896 million at September 30 from 779 million at year-end 2015.
Material changes versus prior comparable periods
- Revenue fell across every reported segment. Q3 North America revenue declined 46%; MENA/Asia Pacific 26%; Europe/SSA/Russia 38%; Latin America 39%; and Land Drilling Rigs 47%.
- The nine-month operating loss worsened substantially, reflecting lower activity and pricing as well as higher unusual charges. Q3 included $740 million of asset write-downs and other charges, including $436 million of long-lived asset impairments, $198 million of inventory charges, $62 million of receivable reserves and write-offs, and $44 million of other asset charges.
- Cash generation weakened: operating cash flow swung from a $383 million inflow in the first nine months of 2015 to a $450 million outflow in 2016. Capital expenditures decreased to $136 million from $542 million.
- Debt structure changed following new borrowing and tender offers; total debt was broadly similar to year-end, but long-term debt increased while short-term borrowings and current maturities declined.
Outlook, commentary, risks and unusual items
- Management believed the industry reached the bottom of the downturn in Q3 and was beginning a modest recovery. It expected weak conditions to continue recovering, with activity concentrated in North America, MENA and Russia; pricing was expected to stabilize, with possible small increases in select markets. These are management expectations, not quantified revenue or earnings guidance.
- Management projected 2016 capital expenditures of approximately $200 million, about 71% below 2015. It said an 8,000-person workforce reduction was completed and expected to close more than 70 operating and non-operating facilities during 2016; over 50 closures had been completed by quarter-end.
- The company recorded a $526 million valuation allowance against deferred tax assets, primarily in the United States, citing historical and projected losses and limited positive evidence of future taxable income. Q3 also included a $137 million non-cash tax charge related to an internal subsidiary restructuring.
- The Zubair contract settlement provided for $150 million gross; $134 million had been received by September 30 and the remaining $16 million was expected in Q1 2017. Cumulative estimated losses on the Iraq contracts were $532 million.
- A $120 million PDVSA trade receivable was exchanged for a three-year note; Weatherford recorded an $84 million fair-value loss. The company also recognized $190 million of litigation charges in the first nine months, including a $140 million SEC settlement. The SEC settlement requires payments in installments and two years of reports and certifications concerning tax internal controls.
- Other key risks include continued oilfield demand and pricing weakness, high indebtedness and access to capital, potential further impairments, tax uncertainty, litigation and contractual obligations. The company reported $751 million of letters of credit and performance and bid bonds outstanding; beneficiaries could call certain obligations. Angola currency-conversion limits may constrain repatriation of cash, including $122 million held in kwanza.
Most important facts for investors to verify
- Whether the anticipated industry recovery and stabilization in pricing translate into higher activity, revenue and operating cash flow.
- Debt maturities, borrowing availability, covenant headroom and the ability to meet interest and other cash requirements amid continuing losses.
- The assumptions supporting the $526 million deferred-tax-asset valuation allowance and the potential for further tax charges or reversals.
- Collection of the remaining $16 million Zubair settlement and recoverability of the PDVSA note after its fair-value adjustment.
- Cash costs and completion of workforce and facility-reduction plans, and the extent of any additional impairments or litigation and contingent liabilities.