Weatherford International plc — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; the filing also reports quarterly results. Amounts are in U.S. dollars unless noted.
Business context
Weatherford is a global oilfield-services company operating in more than 100 countries. Its five reportable segments are North America, Latin America, Europe/Sub-Sahara Africa/Russia, Middle East/North Africa/Asia Pacific, and Land Drilling Rigs. The year was marked by a sharp oil-price decline, reduced customer spending, lower activity, and pricing pressure. North American average rig count in Q4 fell to 910 from 2,294 in Q4 2014; international rig count was 1,105 versus 1,315.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $9.433 billion | $14.911 billion |
| Operating income (loss) | $(1.546) billion | $505 million |
| Net loss attributable to Weatherford | $(1.985) billion | $(584) million |
| Diluted loss per share | $(2.55) | $(0.75) |
| Operating cash flow | $706 million | $963 million |
| Capital expenditures | $682 million | $1.450 billion |
| Cash and cash equivalents at year-end | $467 million | $474 million |
| Total assets | $14.787 billion | $18.889 billion |
| Total shareholders’ equity | $4.365 billion | $7.033 billion |
- Revenue declined 37%. North America was down 49%; Latin America 23%; Europe/SSA/Russia 28%; MENA/Asia Pacific 19%; and Land Drilling Rigs 43%.
- Gross profit was $1.412 billion, approximately 15.0% of revenue, versus $3.450 billion, approximately 23.1%, in 2014. Q4 2015 revenue was $2.012 billion, gross profit $78 million, and net loss attributable to Weatherford $1.208 billion.
- Operating cash flow less capital expenditures was approximately $24 million. Operating cash flow declined $257 million year over year; management cited lower operating results and a $105 million net payment related to the Freedman litigation.
- Year-end short-term borrowings and current portion of long-term debt were $1.582 billion; long-term debt was $5.879 billion. Cash and current assets were $5.564 billion against current liabilities of $4.031 billion.
- At December 31, the $2.25 billion revolving credit facility had $1.267 billion available, with $967 million drawn and $16 million in letters of credit. A February 1, 2016 amendment reduced the facility limit to $2.0 billion and temporarily adjusted its leverage covenant.
Material changes and unusual items
- 2015 operating results included $768 million of long-lived asset impairment and other related charges, $232 million of restructuring charges, $116 million of litigation charges, and $25 million of equity-investment impairment. The $768 million included $638 million of asset impairments and supply-agreement and other related charges.
- Cost reductions included a 14,000-position workforce reduction and closure of operating and service facilities. Management reported $973 million in annualized savings from the 2015 cost-reduction initiative. Inventory write-down charges were $186 million; bad-debt expense was $48 million.
- Weatherford recorded $85 million of currency-devaluation and related charges, compared with $245 million in 2014. Foreign-currency translation reduced shareholders’ equity by $789 million in 2015.
- Losses on long-term early-production facility projects in Iraq were estimated at $532 million in total at year-end; $153 million of additional project losses were recognized in 2015. Project estimates included $116 million of claims revenue, whose realization remains uncertain.
- In 2014, asset-sale proceeds were approximately $1.8 billion and reduced debt; the company recorded a $349 million net gain on business and investment sales. No material divestitures were completed in 2015. Weatherford continued to intend to divest its remaining Land Drilling Rigs business when market conditions improve.
Outlook, risks and contingencies
- Management expected market conditions to weaken further in the first half of 2016, with a possible slight recovery in the second half if commodity prices stabilized. It forecast 2016 capital expenditures of approximately $300 million, 56% below 2015, and planned a further 6,000-position workforce reduction in the first half of 2016, with estimated severance charges of $75 million to $95 million.
- Principal risks include continued low oil and gas prices, customer budget and pricing reductions, high debt and refinancing needs, lower credit ratings, restricted access to capital, customer collection risk, currency controls and devaluations, geopolitical disruption, and further asset impairments. The company’s services contracts are generally short-term and cancellable.
- Latin American customers accounted for 38% of net receivables; $205 million was due from PDVSA and $47 million from Pemex. Management highlighted collection and currency risks, including limits on converting and repatriating Angolan kwanza cash.
- The $120 million Freedman securities-class-action settlement was approved and paid into escrow; Weatherford recovered $15 million from insurers in Q4 and was pursuing further reimbursement. SEC and DOJ investigations concerning historical tax-control weaknesses and financial-statement restatements remained ongoing; the company said it could not estimate potential losses.
- Credit ratings had fallen below investment grade at S&P and Moody’s by late 2015; Fitch lowered its rating to BB in January 2016, and Moody’s placed its rating under review for downgrade. The 2016 maturity schedule and amended credit-facility terms warrant close attention.
- Management and KPMG reported effective internal control over financial reporting at December 31, 2015; KPMG issued unqualified opinions on the financial statements and internal controls. The filing notes, however, the prior tax-accounting material weakness and continuing government investigations.
Investor verification priorities
- Verify debt maturities, borrowing availability, covenant compliance, and the company’s ability to refinance or repay near-term obligations.
- Track cash generation after capital expenditures, working-capital changes, and the sustainability of reported cost savings amid continued activity and pricing declines.
- Assess the recoverability and timing of Iraq project claims and the potential for additional contract losses or liquidated damages.
- Monitor collection of PDVSA and other concentrated receivables, foreign-exchange restrictions, and the value and accessibility of cash held outside Ireland.
- Confirm insurance recoveries and any further exposure from shareholder litigation, SEC/DOJ investigations, and other contingencies.
- Evaluate whether 2016 market, workforce, capital-spending, and divestiture expectations were achieved; the filing’s outlook is forward-looking and subject to substantial uncertainty.