More Cost Take Outs?
The new management team led by CEO Mark McCollum has rationalized costs cut unnecessary overhead, and reduced headcount. In Q4 the company incurred $1.6 billion in extraordinary charges, including $43 million in severance costs. At the year-end Weatherford had 29,200 employees. Over the past two years Weatherford has reduced its employee headcount by over 10,000. The company plans to eliminate another 1,000 employees which could generate $115 million in annual savings:
This shift in structure and the subsequent impact on our reportable segments which will likely result in two reporting segments, eastern and western hemisphere, will be reflected in the fourth quarter 2017 results and in our 10K. This realignment and efficiency initiative will generate an initial $115 million in annualized cost savings from a targeted head count reduction of approximately 1000 employees. And we expect to finalize this realignment by year-end. At the time of this call, we have completed approximately half of the reductions and realized about 50% of the targeted savings.
The headcount reductions are part of a $1 billion profit improvement plan management expects to execute over the next 18 to 24 months. Despite headcount reductions the company still cannot generate enough EBITDA to cover interest expense. It begs the question, “At what point do employee morale and worker productivity suffer from the massive lay offs?” Secondly, management has given no indication as to whether head count reductions can help service the company’s debt load. Lastly, if oil prices falter and Weatherford’s top line declines then the loss of scale could potentially mute the benefits of cost take outs.
Conclusion
Weatherford’s debt is untenable. Instead of restructuring its debt load management would rather lay off workers. I doubt if headcount reductions can overcome its $7.7 billion debt load and $570 million in annual interest costs. WFT remains a sell.
