Business context and reporting period
Weatherford International plc provides oilfield products and services worldwide, reporting Western and Eastern Hemisphere segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparative results are for 2018. The filing was signed August 5, 2019. A critical subsequent event: the company and two subsidiaries filed for Chapter 11 on July 1, 2019, one day after quarter-end.
Financial performance and condition
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,309 | $1,448 | $2,655 | $2,871 |
| Operating loss | $(118) | $(73) | $(419) | $(112) |
| Net loss attributable to Weatherford | $(316) | $(264) | $(797) | $(509) |
| Loss per share | $(0.31) | $(0.26) | $(0.79) | $(0.51) |
| Operating cash flow | Not separately stated | Not separately stated | $(478) | $(315) |
Q2 consolidated operating margin was approximately -9.0%, compared with -5.0% a year earlier. Segment operating income was $39 million, about 3.0% of revenue, versus $69 million, about 4.8%. H1 segment operating income was $68 million, about 2.6% of revenue, versus $109 million, about 3.8%. The reported operating loss included goodwill impairment and restructuring-related items, partly offset by divestiture gains.
- Revenue mix and change: Q2 products revenue was $498 million, up from $462 million; services revenue was $811 million, down from $986 million. Total Q2 revenue fell 10% year over year; H1 fell 8%. Excluding revenue from divested businesses, management said revenue declined 2% in Q2 and 1% in H1.
- Cash and liquidity: Cash and equivalents were $618 million at June 30, up from $602 million at year-end 2018. Current assets were $3,406 million and current liabilities $2,889 million. H1 operating cash use was $478 million; investing provided $223 million, including $301 million of business-sale proceeds, and financing provided $269 million.
- Debt and equity: Short- and long-term debt totaled approximately $8,296 million at June 30, compared with $7,988 million at December 31, 2018. Shareholders’ deficiency was $4,389 million. The filing reported $7,304 million carrying value for senior notes and $3,855 million fair value at June 30.
- Significant charges and gains: Q2 goodwill impairment was $102 million; H1 impairment was $331 million. Prepetition restructuring-related charges were $76 million in Q2 and $86 million in H1. The company recorded a net gain on business sales of $114 million in Q2 and $112 million in H1.
Material changes versus the prior comparable period
Revenue and segment operating income declined, with the largest operating pressures in the Western Hemisphere. Management attributed weaker results to lower activity in the U.S. and Canada, unfavorable product mix, project start-up costs, and disposed businesses. Latin American integrated-service projects and Eastern Hemisphere operational improvements partly offset those declines. Goodwill impairment and prepetition costs drove much of the increase in reported operating losses; excluding goodwill impairment, prepetition charges and divestiture gains, management said operating results improved $19 million in Q2 and declined $2 million in H1 year over year.
H1 operating cash use increased from $315 million to $478 million. Management cited working-capital requirements, debt interest, restructuring and transformation spending, professional fees, slower customer collections, and tighter supplier credit terms. Interest expense rose to $160 million in Q2 and $315 million in H1, from $152 million and $301 million, respectively.
Outlook, restructuring, and risks
- Chapter 11 and proposed restructuring: The RSA, supported as of July 12 by creditors holding over 80% of unsecured notes, contemplated reducing funded debt by approximately $5.85 billion. Proposed terms included exchanging existing unsecured notes for 99% of reorganized equity and $1.25 billion of new seven-year notes; existing equity would be cancelled in exchange for 1% of new equity and three-year warrants for up to 10%. The plan remained subject to court and other approvals, and completion was not assured.
- Post-quarter financing: On July 3, the debtors borrowed approximately $1.4 billion under DIP facilities (revolver commitments up to $750 million and a term loan up to $1.0 billion), repaid approximately $616 million of term-loan and 364-day facility debt, and cash-collateralized approximately $271 million of letters of credit. The DIP agreement includes a $150 million minimum-liquidity covenant. Management expected DIP funding to support operations during the cases but cautioned that liquidity adequacy was uncertain.
- Going concern and securities: Management disclosed substantial doubt about the company’s ability to continue as a going concern. The June 30 statements contain no bankruptcy or liquidation accounting adjustments. NYSE trading had been suspended in May; shares traded OTC under WFTIQ after the Chapter 11 filing. The filing warns that existing equity could be heavily diluted and that a plan may not be confirmed in the U.S., Ireland, or Bermuda.
- Operating outlook: Management expected North American E&P spending to decline in 2019, with subdued Canadian activity and continued pricing and utilization pressure. Latin America was expected to remain constructive; Eastern Hemisphere expectations were mixed. 2019 capital expenditures were projected at approximately $250 million, subject to activity and liquidity. The targeted $1 billion of incremental adjusted earnings versus 2017 was expected to be achieved beyond the original year-end 2019 target; transformation savings had fallen short of expectations.
- Other risks and contingencies: The filing cites volatile oil and gas markets, customer collection delays, tighter supplier terms, employee retention, restructuring execution, and potential further asset impairments. It reports $29 million of accrued litigation and settlement liabilities and a $24 million liability for expected penalties under minimum purchase commitments. The company said patent-litigation losses were considered unlikely, but adverse outcomes in litigation could be material.
Important facts for investors to verify
- Progress, court approvals, milestones, and final terms of the Chapter 11 plan, Irish examinership, and Bermuda proceedings; confirm whether the proposed restructuring was completed.
- Actual post-petition liquidity, DIP borrowings and availability, minimum-cash covenant compliance, and cash burn compared with management’s expectations.
- Final treatment and recovery for existing shareholders and unsecured creditors, including the equity allocation, warrants, conversion rights, and dilution from any incentive plan.
- Whether revenue, margins, customer collections, supplier credit terms, and transformation savings improved or deteriorated against management’s outlook.
- Any additional goodwill or long-lived asset impairments, and material developments in litigation, purchase commitments, or tax exposures.