I have been a Weatherford (WFT) bear for a few years now. In November 2016 I predicted the company was insolvent by about $4 billion. However, financial markets have been kind to the company. The melt up in stocks and oil prices have allowed Weatherford to sell assets and raise capital to fund itself. In 2016 the company raised $4.3 billion via a mix of debt and equity securities in order to fund operating losses and push back debt maturities.
Total debt at Q4 2016 was $7.6 billion. At Q4 2017 Weatherford’s debt load was $7.7 billion. After rising oil prices, spikes in the North America rig count and asset sales, Weatherford’s debt remains intractable. Investors should avoid WFT for the following reasons.
Weatherford’s Interest Expense Exceeds EBITDA
Rising tides lift all boats and the spike in oil prices have been boon to Weatherford. The company’s Q4 revenue of $1.5 billion was up 6% Y/Y and 2% Q/Q. The Q4 rig count was up over 40%, yet Weatherford’s revenue growth did not come closing to matching it. The company is known for its North America land drilling prowess. Revenue from the Western Hemisphere (including North America) was only up 3%.
Weatherford changed how it reports its segment revenue and earnings. It is now difficult to attain how much revenue and earnings came from North America, Latin America, or Europe. However, management did cite on the earnings call that North America revenue rose 12% sequentially.
That said, Weatherford reported EBITDA of $70 million during the quarter, up 37% Y/Y. However, its 5% EBITDA margins were paltry and paled in comparison to Halliburon’s (HAL) and Schlumberger’s (SLB) which were in the high-teens and low 20% range, respectively. If Weatherford cannot generate double-digit EBITDA margins in this environment then when can it?
It incurred net interest expense of $152 million; interest expense was more than double its EBITDA. It implies the company is running in quicksand and could eventually die a slow death. Its debt/run-rate EBITDA now exceeds 27x EBITDA. This is untenable in my opinion. The company either needs to raise more equity or find an ingenious way to pare debt some other way.
Asset Sales May Not Be The Answer
Management recently completed the sale of its U.S. hydraulic fracturing and pump-down perforating assets for $430 million to Schlumberger. This may have improved liquidity in the short-term and bought the company more time. The problem with asset sales is that the company must forgo the revenue and earnings from divested assets; Weatherford needs all the cash flow it can get. The company expects to hive off another $500 million or in assets in the future:
Even though the market to sell is not immediately favorable, we’re still getting prepared and will carefully watch and evaluate the timing. But based on our plan, we believe we can generate approximately $500 million of incremental divestiture proceeds over the next 12 months from selling these additional businesses.
In the past, asset sales or announced deals might have spiked the stock and allowed Weatherford to raise capital at a much higher share price. Something appears to be different this time. WFT is off over 60% Y/Y despite its recent asset sale and expected asset sales. As the Fed winds down its balance sheet and takes liquidity out of the system, the consistent melt up in stocks may grind to a halt. That would not bode well for Weatherford which has feasted on capital raises to keep itself afloat.
