Embattled Weatherford Engages Morgan Stanley To Sell Assets

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Source: Forbes
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Weatherford International (WFT) has benefited from the rise in oil prices, yet the company still needs to pare debt. It recently engaged Morgan Stanley (MS) to sell assets to further pare debt:

U.S. oil services firm Weatherford International has appointed advisers including Morgan Stanley to sell units starting in the first quarter of 2018, banking sources told Reuters …

Three banking sources said the company was looking to offload the artificial lift business, the wellheads and the drilling tools units and the international pressure pumping assets.

Potential bidders for the pressure pumping assets included U.S. firm Superior Energy Services, Canada-based pressure pumper Calfrac and private equity backed energy funds, the sources said.

The oil services giant was punished after oil prices fell below $30 in the first quarter of 2016, down from over $100 two years earlier. The company is still dealing with unbridled expansion and a $7.9 billion debt load amassed when oil prices were much higher.

The Situation

Animal spirits returned to the oil patch when OPEC agreed to cut oil supply which helped spike oil prices. North American shale plays opened up the spigots, which particularly helped land drilling firms like Weatherford and Halliburton (HAL) who have out-sized exposure to the sector. In Q3 Weatherford’s revenue rose 3% Q/Q, while North America was up 13%.

The pricing environment in North America has improved and the bigger players like Halliburton and Schlumberger (SLB) are no longer using their balance sheets to win business. Lesser-capitalized Weatherford has been able to survive in the oil patch long enough to generate positive free cash flow and shore up its balance sheet somewhat.

The company generated $163 million in EBITDA in Q3, up from $68 million in the year earlier period. It finally made money in North America, where Weatherford generated EBITDA of $72 million. It had historically lost money in the region. Better pricing power and headcount reductions have helped rightsize the business. However, Weatherford only has $445 million in cash amid a $7.9 billion debt load. It will receive $535 million for contributing assets to its North America joint venture with Schlumberger, but its cash infusion pales in comparison to its debt load.

Weatherford’s debt load remains untenable based upon several metrics. Debt exceeds 12x EBITDA, which makes it one of the most-highly leveraged names in oil services. Its quarterly EBITDA barely covers its $148 million in interest expense. If oil markets turn down then interest expense could exceed EBITDA, and the company could potentially die a slow death.

Will Buyers Bite On Assets At Height Of The Market?

The fact that Weatherford is attempting to sell assets related to land drilling – its bread and butter – illustrates how desperate the company is. The question remains, “Will potential buyers be willing to do a deal at the height of the market?” The U.S. rig count is up 46% Y/Y, but it fell by four to 747 for the week ended December 15th. Sans more OPEC supply cuts the rig count might have plateaued. Going forward shale oil plays might make trade offs between preserving capital and more E&P.

The risk for a buyer is that it might acquire land drilling assets today whose value and cash flow might be much less next year or two years from now. Secondly, Weatherford generated free cash flow of -$631 million through the first nine months of the year. It has not been free cash positive for a while now and has been kept afloat by raising new money. At its current pace I do not expect the company to last long. If oil markets turn down it could amplify Weatherford’s cash burn. A buyer could potentially wait 12 to 18 months and buy the entire company for pennies on the dollar relative to its $7.9 billion debt load.

Conclusion

I believe it could be difficult for Weatherford to sell land drilling assets at the height of the market. WFT remains a sell amid its untenable debt load.

On Trump And The Global Economy

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