Turnaround Letter Buy-recommended Weatherford International (NYSE: WFT) reported a strong increase in Adjusted EBITDA as its operational overhaul plan is working under new CEO Mark McCollum. However, the company needs some help from oil prices and other factors beyond its control to meet its looming $2.7 billion in debt maturities in 2020 and 2021. We continue to rate Weatherford shares a HOLD due to the risks that a debt restructuring could be highly dilutive.
Weatherford reported an adjusted net loss of $140 million, or ($0.14)/share, much smaller than the year-ago net loss of $329 million, or ($0.33)/share, a year ago. Adjustments of just over $2 billion, primarily for goodwill impairment of long-ago acquisitions, produced the difference from the reported net loss of $2.1 billion.
Fourth quarter revenues were 4% below a year-ago. The company did not report revenues net of divestitures.
Adjusted EBITDA of $210 million was sharply higher than the $73 million a year ago. The Adjusted EBITDA margin of 14.7% compared to 4.9% a year ago.
Compared to consensus estimates, Weatherford showed modestly better profits while matching revenue estimates.
Weatherford shares jump on the news
Weatherford shares gained 40% in the two days following the report and currently are up 54% year-to-date.
Stable revenues are helping bolster Weatherford’s outlook. Relatively steady demand for its shale drilling services, stronger international demand, and more focused and organized sales efforts are contributing to the stability.
The most encouraging result is the progress toward improving EBITDA by $1 billion through a complete overhaul of Weatherford’s operations. The company boosted quarterly EBITDA by $137 million on basically flat revenues. For the full year, Weatherford’s EBITDA improved to $753 million, about $334 million better than 2017 on essentially flat revenues. Clearly, the company is moving in the right direction.
Weatherford produced positive operating cash flow, although this was helped by divestiture proceeds. For all of 2019, the company expects to produce positive operating cash flow.
The divestiture program has yielded $646 million in net proceeds since December 2017, with another $327 million expected by mid-2019. Combined with the cash being released from excess inventory and receivables, Weatherford is bridging its cash short-fall gap until its EBITDA reaches a high-enough level to sustain the company.
Competitively, the company’s newer products and services are gaining traction on restrained capital spending, with what appears to be disciplined pricing to provide healthy margins.
Biggest risk driving our HOLD rating is the upcoming debt maturities
The looming debt maturities in 2020 and 2021 represent Weatherford’s biggest risk. Of its $8.0 billion in debt, $2.7 billion comes due in this time period. If it had much lower debt, or if the maturities were five years away, for example, Weatherford would have plenty of time to turn around its operations. Management described its priority as fixing the operations, yet is beginning to address the debt overhang. An unsuccessful refinancing effort would likely result in an equity-diluting restructuring.
Weatherford expects to reach its $1 billion in EBITDA improvements by the end of this year. Its conservative $50-$60/barrel oil price assumption supporting this goal seems reasonable. Overall, we think Weatherford has a good chance of reaching its cost savings goal. Yet will need some help from factors outside its control to achieve and then grow beyond $1 billion in actual EBITDA to successfully refinance its upcoming debt maturities and then to begin chipping away at its total debt load.
We continue to rate shares of Weatherford International (NYSE: WFT) a HOLD.
Disclosure Note: An employee of the Publisher owns WFT shares.