Rising tides lift all boats and Weatherford International (WFT) has benefited mightily from the spike in oil prices over the past year. The company recently sold its U.S. pressure pumping assets to Schlumberger (SLB) for $430 million:
U.S. oilfield services company Weatherford International Plc (WFT.N) on Friday sold a U.S. oil-well business to rival Schlumberger NV for $430 million, abandoning a planned joint venture.
Weatherford has struggled with losses and has been looking to sell units and raise cash to reduce about $7.9 billion in debt. It suffered a $875 million loss on $4.21 billion in revenue for the first nine months of this year.
I have been one of the biggest WFT bears over the years. The company engaged in unbridled expansion when oil prices were much higher. It strung together acquisitions and invested in capital expenditures backed by debt. The oil services giant was punished after oil prices fell below $30 in the first quarter of 2016; prices have bounced back amid OPEC oil supply cuts and geopolitical risk in oil-related regions. Shale oil plays have also opened the spigots. Through the week ended January 5, 2018 the U.S. rig count was up over 35% Y/Y; however, it fell by five versus the previous week.
North America land drilling has been white hot. Halliburton (HAL) and Baker Hughes, a GE Company (BHGE) have more exposure to the segment than Schlumberger. The deal gives Schlumberger a bigger presence in pressure pumping; it also has the balance sheet to carry additional pressure pumping assets in case the market turns down. The transaction also allows Weatherford to monetize assets on its balance sheet to help pare its $7.9 billion debt load.
Weatherford Has To Forgo OneStim JV With Schlumberger
Weatherford and Schlumberger had previously entered into a joint venture (“JV”) called OneStim that was expected to provide completion services for unconventional oil plays in North America land markets. OneStim was expected to have one of the largest hydraulic fracturing fleets in the industry. Weatherford was to own 30% of the JV and Schlumberger 70%. Weatherford was also to receive a cash payment of $535 million. I expected Weatherford to (1) enjoy the benefits of scale OneStim and Schlumberger could offer and (2) a potential sweetener on the back-end if Schlumberger decided to buyout Weatherford’s 30% stake in the future.
Now the company will receive less cash ($430 million versus $535 million) and will face an untenable debt load. If you simply reduced its $7.9 billion debt load by $430 million the remaining $7.5 billion would exceed 11x run-rate EBITDA. Weatherford generated Q3 Y/Y revenue growth of 3% and EBITDA of $163 million. If its operations were to turn down slightly the company might not be able to cover its $148 million of quarterly interest expense.
Weatherford can continue to tread water or attempt an equity raise to help pare debt. The company raised $4.3 billion in capital in 2016 and it still remains highly-indebted. Another equity raise could sink the stock. By going it alone the company could get soaked with interest costs and die a slow, painful death.
The $430 million sale of pressure pumping assets buys Weatherford time and gives it nearly $900 million of liquidity. However, the company still has too much debt. Sell WFT.
On Trump And The Global Economy
Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?