Weatherford International Plc quarterly report, Q2 FY2014

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Business context and reporting period

Weatherford International plc filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The oilfield-services company operates across four geographic segments: North America, MENA/Asia Pacific, Europe/SSA/Russia, and Latin America. On June 17, 2014, it completed its redomestication from Switzerland to Ireland; its NYSE ticker remained WFT.

Key financial metrics

MetricQ2 2014Q2 2013Six months 2014Six months 2013
Revenue$3.711B$3.868B$7.307B$7.705B
Operating income$25M$55M$155M$334M
Net loss attributable to Weatherford$145M$118M$186M$96M
Diluted loss per share$0.19$0.15$0.24$0.12
  • Reported operating margin was approximately 0.7% in Q2 2014 and 1.4% in Q2 2013; for the first half it was 2.1% and 4.3%, respectively. The 2014 results included $268M of non-cash asset and goodwill impairments.
  • Excluding those impairment charges, management reported operating income of $293M for Q2 and $423M for the first half, versus $55M and $334M in the respective 2013 periods.
  • Operating cash flow was $29M for the first half, compared with $241M. Capital expenditures were $662M, versus $846M, resulting in approximate free cash flow of negative $633M before other investing items.
  • Cash was $571M at June 30, up from $435M at year-end 2013. Total debt was approximately $9.425B ($2.404B current and $7.021B long-term), versus $8.714B at year-end. Net debt was approximately $8.854B.
  • The $2.25B revolving credit facility had $661M available after borrowings, commercial paper and letters of credit. Weatherford reported compliance with its debt-to-capitalization covenant, which requires a ratio below 60%.
  • Total assets were $21.813B and shareholders’ equity was $8.050B at June 30. Net interest expense was $128M for Q2 and $254M for the first half.

Material changes versus prior periods

  • Revenue fell 4% in Q2 and 5% for the first half. North America and Europe/SSA/Russia grew, but international revenue overall declined; Latin America revenue fell 26% in both comparisons, mainly following completed Mexican projects and reduced Venezuelan activity.
  • North America Q2 revenue increased 9%, supported by demand and pricing in pressure pumping, artificial lift, completions and formation evaluation. Europe/SSA/Russia Q2 revenue rose 10%, with stronger European activity and new Sub-Saharan African contracts.
  • MENA/Asia Pacific Q2 revenue decreased 18%, largely due to lower activity on legacy Iraq contracts and weaker activity in Australia and Indonesia. First-half segment income was also affected by $28M of estimated losses on two Iraq percentage-of-completion projects; total estimated losses on those projects were $335M at June 30.
  • Latin America operating income declined amid reduced activity, although first-half margins improved with the completion of lower-margin work and a focus on higher-margin activity.
  • Short-term borrowings rose to $2.327B from $1.580B at December 31. First-half financing cash inflow of $722M, including $738M net short-term borrowing, supported cash while operating cash flow and investing activity were weak.

Outlook, commentary and risks

  • Management expected stronger revenue and margin improvement in the second half of 2014, citing growth in North America, Europe/SSA/Russia and MENA/Asia Pacific excluding legacy Iraq contracts, with Latin America expected to improve.
  • Management targeted $500M of annualized pretax cost savings, said approximately 90% of the initially planned workforce reduction was complete, and estimated total restructuring charges of $125M–$150M. $129M had been recorded in the first half.
  • 2014 capital expenditures were projected at approximately $1.35B. Management expected positive free cash flow for 2014, primarily for debt reduction, supported by earnings improvement and working-capital actions. It forecast a full-year tax rate of 25%–28% and a second-half rate of 25%–30%.
  • Planned divestitures included the pipeline and specialty services business for $250M, subject to closing conditions, and a July agreement to sell Russian and Venezuelan land drilling/workover operations for $500M, also subject to approvals. Proceeds were intended primarily for debt repayment. The rig sale triggered $143M of long-lived-asset impairment and $125M of goodwill impairment in Q2.
  • Major exposures include uncertainty over Venezuelan currency controls: the company used the official 6.3 bolivars per U.S. dollar rate and reported $241M of net bolivar monetary assets; use of an alternate rate could reduce their value. It also reported $90M of net monetary assets in Argentine pesos.
  • Risks include geopolitical instability and possible Russia-related sanctions, heightened security risks in the Middle East, uncertain demand and pricing, and potential execution or approval risks for disposals. The company also noted ongoing tax examinations and government investigations related to historical matters and internal controls.
  • The company paid $253M in January and February to settle prior U.S. government matters. An independent compliance monitor and a retrospective export-control and sanctions audit were ongoing. A proposed $53M settlement of a shareholder class action was funded by insurers, with a final hearing scheduled for September 2014. Other litigation outcomes and potential losses could not be predicted.
  • Management concluded disclosure controls were effective at June 30, 2014 and reported no material second-quarter change in internal control over financial reporting. No defaults upon senior securities were reported.

Important facts for investors to verify

  1. Whether the announced divestitures closed on expected terms and how proceeds affected debt and liquidity.
  2. Progress toward the $500M annualized cost-savings target, restructuring costs and the expected improvement in second-half margins and free cash flow.
  3. Updates to Iraq project-loss estimates, including the $335M estimated total losses on the two percentage-of-completion projects.
  4. Debt maturities, refinancing needs, commercial-paper access and remaining revolver availability, particularly given negative first-half free cash flow.
  5. Venezuelan exchange-rate developments and any effect on the reported $241M net bolivar asset position; also monitor Argentina currency and inflation conditions.
  6. Developments in Russia-related sanctions, ongoing government and tax matters, and litigation or compliance-monitoring costs.