Rising Tides Lift Weatherford

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Source: Forbes

Weatherford reported Q3 earnings last week. The company delivered revenue of $1.46 billion and eps of -$0.22. The company missed on revenue by $20 million, but the results might have put Weatherford in position to survive for a few more quarters. WFT is up about 9% after earnings as investors bet on a recovery I had the following takeaways on the quarter:

North America Delivered As Promised

Total revenue was up was up 3% sequentially and 4% Y/Y. North America powered Weatherford this quarter as expected. North America land drilling has been white hot and revenue from the sector was up 13% sequentially. Weatherford also benefited from the Canadian Spring break up which also spiked the rig count in that country. The phenomenon is what occurs when Canadian rig crews head back to work are taking time off in the spring.

Through mid-October the U.S. rig count was 913, up 65% Y/Y. However, it declined for two consecutive weeks. Some industry participants believe the rig count could slow as shale oil plays look to preserve capital. Weatherford currently receives 38% of its revenue from the region. Even if land drilling slows the company is better off than it was when oil prices were sub $50 and bigger players like Halliburton (HAL) and Schlumberger (SLB) were locked in a price war.

Of note is that Latin America revenue was up 13% off of a low base. Q2 results were negatively impacted by a $42 million change in the company’s accounting for revenue in Venezuela. The country is having trouble paying its bills which means Weatherford’s revenue from Latin America (16% of total revenue) could stagnate from here. Overall, it might be too early to turn bullish on WFT. As long as another price war does not ensue then the company could likely maintain itself for several more quarters.

EBITDA Was Ebullient

Likely the biggest surprise during the quarter was the rebound in EBITDA. Though Weatherford has enjoyed the benefits of out-sized exposure to North Anerica land drilling the company has experienced losses for several quarters. The performance always vexed me. How do you lose money in your bread and butter? This quarter Weatherford generated EBITDA of $163 million, up nearly 70% versus Q2 EBITDA of $96 million. EBITDA in North America was $72 million, compared to $42 million in Q2. The company’s total EBITDA margin increased to an acceptable 11%. That pales in comparison to Schlumberger’s (around 23%) and Halliburton’s (around 19%), but a nice respite from past quarters when the company’s margins were negative.

Weatherford benefited from a rise in E&P, but management has also been cutting costs. Through the first nine months of 2017 the company incurred $140 million of severance and restructuring costs versus $150 million in the year earlier period. The company’s targeted transformation involves 1,000 lay offs and annualized cost savings of $115 million by year-end. Through Q3 Weatherford completed half of the cost savings and half of the head count reductions. That likely portends major cost reductions and additional margin expansion in Q4.

Liquidity

Weatherford’s $7.5 billion debt load is alarmingly high at over 12x run-rate EBITDA. It might not matter to investors in the near term, however. In this market what seems to be more important is whether the company survive to fight another day. Weatherford generated free cash flow of -$631 million through the first nine months of the year, yet ended up with $445 million in cash on hand. Its liquidity should improve once its joint venture with Schlumberger closes. The JV targets North America land drilling. Both companies will contribute fracking assets; Weatherford will own 70% of the JV and receive $535 million in cash.

The company will potentially add more scale in North America as the sector seems to be slowing. Most importantly, the JV would allow Weatherford to monetize certain of its is fixed assets. I would also solidify the company’s ability to remain in business for several more quarters. Weatherford would remain highly-indebted but speculation on a sustained turnaround could send WFT sharply higher.

Conclusion

Rising tides lifted WFT in Q3. The Schlumberger joint venture will likely be a short-term catalyst. Long-term WFT is a sell.

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