Weatherford International plc — Q2 2016 Form 10-Q
Business context and period: Global oilfield equipment and services provider; unaudited results for the three and six months ended June 30, 2016. The business faced a severe industry downturn, lower customer spending, reduced activity and pricing pressure.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1.402bn | $2.390bn | $2.987bn | $5.184bn |
| Operating loss | $460m | $464m | $907m | $414m |
| Net loss attributable to Weatherford | $565m | $489m | $1.063bn | $607m |
| Loss per share | $0.63 | $0.63 | $1.24 | $0.78 |
| Operating cash flow | Not separately stated | Not separately stated | $(344)m | $249m |
| Capital expenditures | Not separately stated | Not separately stated | $74m | $411m |
- Revenue fell 41% in Q2 and 42% in the first half. Q2 declines affected all regions: North America −50%, MENA/Asia Pacific −22%, Europe/SSA/Russia −42%, Latin America −46%, and Land Drilling Rigs −41%.
- Calculated gross profit was $164m in Q2 (11.7% margin), versus $374m (15.6%) a year earlier; first-half gross profit was $275m (9.2%), versus $966m (18.6%).
- Q2 operating loss was nearly unchanged year over year, helped by the Zubair project settlement income and lower certain costs and charges. First-half operating loss more than doubled, reflecting declining activity and pricing pressure.
- At June 30, cash was $452m; current assets were $5.049bn and current liabilities $2.528bn (current ratio approximately 2.0). Total debt was approximately $7.233bn, with $290m classified as short-term/current and $6.943bn long-term. Debt less cash was approximately $6.781bn.
- First-half cash decreased $15m overall despite $420m of financing cash inflow; operating and investing cash outflows were $344m and $56m. Interest paid was $261m.
Material changes and financing
- In June, Weatherford issued $1.265bn of 5.875% exchangeable notes due 2021, $750m of 7.75% notes due 2021, and $750m of 8.25% notes due 2023; it also borrowed $500m under a secured term loan. Proceeds primarily funded a $1.972bn cash tender settlement that retired $1.867bn principal of existing notes; the tender generated a $78m loss.
- The company issued 115m ordinary shares for net proceeds of $623m. Shares outstanding rose from 779m at year-end 2015 to 896m at June 30, 2016; the exchangeable notes could convert into 163.4m shares subject to specified conditions.
- Debt balances shifted toward long-term debt, while short-term borrowings and current maturities fell from $1.582bn at year-end to $290m. The amended $1.38bn revolving facility and $500m term loan were in place; $1.311bn was available under the revolving facility at quarter-end.
Outlook, unusual items and risks
- Management said it believed the industry downturn had reached its bottom and expected a modest recovery, particularly on land in the second half of 2016. It anticipated pricing stabilization, gradual North American activity growth, roughly flat Latin America activity, and modest improvement in parts of Europe/SSA/Russia and MENA/Asia Pacific. These are expectations, not guaranteed results.
- 2016 capital expenditures were projected at approximately $200m, 71% below 2015. The company said it had substantially completed a previously announced 8,000-person workforce reduction and completed over 50 of more than 70 targeted facility closures by quarter-end.
- The Zubair, Iraq contract settlement was for $150m gross: $62m received in Q2, with $72m expected in the second half of 2016 and $16m in Q1 2017. A $52m estimated project income was recognized in Q2. Cumulative estimated losses on Iraq contracts were $532m at June 30.
- A $120m PDVSA trade receivable was exchanged for a three-year note bearing 6.5%; Weatherford marked it down by $84m to estimated fair value. Collection and valuation remain material considerations.
- Weatherford increased its estimated SEC/DOJ investigation settlement contingency to $140m; negotiations continued and the ultimate resolution was uncertain. Other litigation or claims could exceed recorded reserves. It also recorded $135m in expected supply-contract penalties.
- Credit ratings were downgraded by S&P, Moody’s and Fitch, with negative outlooks reported. The company was in compliance with credit facility covenants at June 30, but remains exposed to high indebtedness, downturn risk and access-to-capital conditions.
- Cash included $127m denominated in Angolan kwanza; restrictions on U.S. dollar conversion could constrain repatriation and increase currency exposure. Management reported disclosure controls were effective at June 30, 2016.
Most important facts for investors to verify
- Whether the forecast Zubair settlement receipts were collected on schedule, and how contract estimates or claims changed after quarter-end.
- Whether operating cash flow improves as working capital and activity change; assess cash generation against interest, debt maturities and planned capital spending.
- Debt, covenant headroom, refinancing needs, ratings and the potential dilution or cash obligation from the exchangeable notes.
- Final SEC/DOJ resolution and any additional litigation, supply-contract penalties or environmental liabilities beyond amounts accrued.
- Whether the anticipated second-half recovery and pricing stabilization occurred; management’s filing does not provide quantified revenue or earnings guidance.