Weatherford International plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 10, 2019. Weatherford provides oilfield products and services across Production, Completions, Drilling and Evaluation, and Well Construction, with Western Hemisphere and Eastern Hemisphere reporting segments. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $1.346 billion | $1.423 billion; down 5% |
| Operating loss | $301 million | $39 million loss |
| Operating margin | (22.4%) | (2.7%) |
| Net loss attributable to Weatherford | $481 million; $0.48 per share | $245 million; $0.25 per share |
| Cash from operating activities | $(249) million | $(185) million |
| Cash from investing activities | $36 million | Approximately zero |
| Cash from financing activities | $208 million | $54 million |
Revenue excluding the divested portion of the land-rig business was flat year over year. Reported segment operating income was $29 million, down $11 million; excluding the divested rig operations, segment results improved $6 million. Interest expense was $155 million, compared with $149 million.
At March 31, cash and cash equivalents were $598 million, current assets were $3.406 billion, and current liabilities were $2.504 billion. Short-term borrowings and current debt were $612 million; long-term debt was $7.606 billion. Total reported debt was therefore about $8.218 billion, and shareholders’ deficiency was $4.106 billion. Borrowing availability under the credit agreements was $93 million at quarter-end. The filing subsequently states that, because of going-concern concerns, Weatherford no longer had access to the remainder of its revolving-credit availability.
Material changes and unusual items
- Revenue decreased $77 million. Western Hemisphere revenue fell 4%, primarily due to lower U.S. and Canadian activity; Eastern Hemisphere revenue fell 7%, largely reflecting rig divestitures. Latin American integrated-service and product activity and Eastern Hemisphere Completions partly offset declines.
- A $229 million goodwill impairment was recorded for the North America reporting unit amid lower activity and E&P spending. Asset write-downs and other charges were $49 million, versus $18 million a year earlier; these included disposition-related losses and asset write-downs, partly offset by a legacy-contract reserve reduction.
- Cash used in operations increased to $249 million, driven by working-capital needs, interest, and restructuring and transformation costs. Management reported slower customer collections and suppliers shortening payment terms or reducing credit limits.
- Q1 rig divestitures generated $72 million of gross proceeds. On April 30, 2019, the company completed sales of its laboratory services business for $206 million in cash and its surface data logging business for $50 million, subject to customary adjustments.
Outlook, restructuring, and key risks
- Going concern: Management said it expected not to generate enough liquidity to service all debt and other obligations or comply with debt covenants at some point within the next 12 months. The filing states this raises substantial doubt about Weatherford’s ability to continue as a going concern; the financial statements include no adjustments that might be required if it cannot continue.
- Proposed restructuring (not assured): The company expected to reach a restructuring support agreement with a majority of unsecured noteholders and was negotiating debtor-in-possession (DIP) financing. The proposed transaction contemplated approximately $5.85 billion of funded-debt reduction, cancellation of existing unsecured notes in exchange principally for 99% of reorganized-company common stock and $1.25 billion of new notes, and repayment of secured and revolving-credit debt in cash. Existing equity was proposed to receive 1% of reorganized-company stock and three-year warrants for 10%. Proposed DIP facilities were up to $750 million revolving and $1.0 billion term financing. These terms remained subject to definitive agreements, court approvals, milestones, and other conditions.
- The company disclosed a proposed prepackaged Chapter 11 process and Irish examinership, expected to be filed on or before July 15, 2019. It cautioned that the RSA, financing, court approvals, and restructuring might not be completed; existing shareholders could be materially diluted and their shares were described as highly speculative.
- Business outlook: Management expected North American E&P spending to decline by mid-single-digit to low-double-digit percentages in 2019, with subdued Canadian activity. It anticipated comparatively constructive Latin American activity and growth in parts of the Eastern Hemisphere, while noting divested Middle East rig operations would weigh on regional results. Planned 2019 capital expenditures were approximately $250 million, subject to liquidity and activity.
- Transformation savings targeted at $30 million for Q1 were not achieved. The stated goal of $1 billion in incremental adjusted earnings before interest, taxes and depreciation versus 2017 was expected to take significantly longer than the original year-end 2019 target.
- Other uncertainties include commodity prices, customer collections, supplier credit, employee retention, additional asset impairments, and execution and timing of divestitures. The filing reported $32 million of accrued litigation and settlements and a $24 million liability for expected penalties under a minimum-purchase commitment. Patent litigation outcomes were considered unlikely to result in a loss, but an adverse outcome could be material.
Most important facts for investors to verify
- Whether definitive restructuring and DIP-financing agreements were signed, and whether U.S. and Irish court proceedings and required milestones were completed.
- Actual liquidity, cash burn, borrowing access, debt service needs, and compliance with debt covenants after quarter-end.
- Final restructuring distributions and dilution for existing shareholders, including treatment of proposed warrants and convertible notes.
- Cash proceeds and final working-capital adjustments from the April 30 business sales, and progress on remaining divestitures.
- Whether operating trends, collections, supplier terms, and transformation savings improved or deteriorated relative to management’s outlook.