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Weatherford Finessing U.S. Land Operations, Eschewing Fracking, Rigs

Following years of turmoil undercut by flailing commodity prices, Weatherford International plc has overhauled its management team, rebranded its mission and has a "fresh outlook and a new strategy" designed to create a drilling technology powerhouse, interim CEO Krishna Shivram said Thursday.

The long-time Weatherford executive, who took over following Bernard Duroc-Danner resignation last fall, is on the short list of candidates to run the company; the board meets March 10 to vote. However, he made clear during a conference call to discuss fourth quarter and 2016 performance that he is more than ready for prime time.

"Weatherford is back," he told investors and analysts during a hour-plus conference call. "We have a new team, a fresh outlook, a new strategy...and a high level of energy within the company not seen in recent years. We have just been through the most brutal downcycle in our industry's history, and we have not only survived, we have transformed the company internally and positioned it well for the multiyear upcycle that is just about beginning."

The formerly bloated oilfield services operator, No. 4 in the world, in the past year reduced costs by an annualized $601 million, exceeding internal targets. The support ratio was "rationalized down to 35% at year-end,” while the company successfully termed out debt maturities to 2019 and beyond. “This financial runway, including covenant management, is now clear for the next few years."

No More U.S. Pressure Pumping

Revenue grew in the fourth quarter by 4% sequentially, with operating income incrementals of 68%, "easily exceeding our targeted 50%." In North America, weighted to U.S. land, Weatherford plans to sell its hydraulic fracturing (fracking) business. Regardless, "revenue grew 8% and would have grown 17% had we continued our pressure pumping work for the full quarter," Shivram said. North American incrementals were 104%, "as we took costs out right through the quarter." Internationally, revenue grew by 2%, while operating margins improved slightly.

First quarter revenue is expected to be impacted by $70 million as the company suspends its U.S. pressure pumping and by another $40 million as "product sales return to normal levels...On the positive side, we will see a seasonally stronger Canada, increased service revenues in the Middle East, North Africa region, and higher rigs revenue with the start-up of three additional contracted rigs in Algeria. Operating income will be helped by the absence of the U.S. pressure pumping losses and cost savings from the Project 300.

Even without U.S. pressure pumping, Weatherford is expecting strong growth in North America this year, "driven by completions, artificial lift, managed pressure drilling, and drilling services, with pricing power improving right through the year as supplies tighten," said Shivram.

"Based on these factors, we have decided to pursue a disposition strategy, rather than re-enter the frack market on U.S. land."

The plan is to consolidate the domestic pressure pumping business with another industry player, "to create scale in the market and jointly reach combination synergies with cost and supply chain savings. Alternatively, we will also pursue an outright sales strategy if we receive a reasonable offer."

Today, Weatherford has 1.04 million hp in the United States, comprising roughly 20 operating fleets. Nine of the fleets are ready to go back to work with zero capital expenditures (capex); they were demobilized about a month ago. One fleet is hot stacked, while 10 fleets are cold stacked and require $5-7 million of capex per fleet to reactivate.

"In other words, we have a strong, well-maintained fleet," Shivram said in his conference call pitch to potential buyers. "In addition, we have an operating team that is conversant with the business, three service centers, transloading capacity of 58,000 tons, 750 railcars and long-term sand supply contracts at fixed prices in what is becoming a rapidly tightening market."

Land Rigs Business Marketed

Weatherford also plans to divest its land rigs business "when utilization levels improve across 2017 and 2018...Today we have 110 rigs in our fleet. In 2017, we plan to upgrade 90% of our active fleet" with state-of-the-art equipment, including software upgrades.

The company plans to push for "closer integration with our other product lines to be more competitive on integrated services. With these steps, we expect to improve the performance of the rigs business so that we can monetize this business in the back half of 2018.

"In total, we expect to monetize these two businesses for between $1.5 billion to $2 billion," Shivram said. "These numbers could be conservative, depending on market conditions at the time of disposition. When you adjust for all of these items...our pro forma net debt reduces from $6.5 billion at the end of the 2016, down to a range of $2.7 billion to $3.2 billion at the end of the 2021. We believe this debt reduction journey, as I have explained it, is eminently achievable and it is the single highest priority of the company to reduce net debt below $3 billion by 2021."

Repositioning the company as the industry comes out of the downturn is paramount, Shivram said.

"Instead of trying to be a one-stop shop for everything from greenfield exploration to well abandonment, we need to recognize and focus on the sweet spots of Weatherford," he told analysts. "Weatherford plays largely in the production arena, rather than exploration, and is more well-centric than reservoir-centric."

The plans is to become the top well construction and production optimization company, which he defined as planning, designing and drilling a well, ensuring its integrity and completing it.

"In this portfolio, Weatherford has unique value adding technology, such as managed pressure drilling, or MPD, tubular running services, or TRS, and today we are global leaders in well construction projects and fishing and remedial services."

In directional drilling, he said, Weatherford's logging while drilling measurements match up to any competitor. "You notice I did not mention 'frack' anywhere. While hydraulic fracturing is an essential part of well construction and we have retained the full capability internationally, we believe the frack market in the U.S. is commoditized and best left to export practitioners of that business. To synthesize, we believe we can plan, drill, case, secure and complete a well or, in summary, construct a world-class well for our customers better than anybody else."

‘Land Development’ Is Future

Management instead expects the next five years to "belong to the land development arena...This also means that capital intensive product lines, such as U.S. pressure pumping and land rigs, will be disposed and monetized, making Weatherford an asset-light company with improved returns."

More sales/service channels also are to be opened as Weatherford shrinks its offerings while expanding its market.

"We believe the entire industry should gear itself for a medium-for-longer oil price environment," Shivram said. "This means that for the foreseeable future, we should expect oil prices to oscillate within the $50-70 /bbl band, as the U.S. becomes a swing producer and provides both bookends to this pricing arrangement."

For the oilfield industry to survive, he explained, "everyone in the value chain has to make an acceptable economic return, starting with the operator, the drilling contractors, the service companies, and the equipment manufacturers. The only way to do this is to lower the cost of producing a barrel of oil to the point where everyone makes a decent return within this oil price band.

"Today, that is certainly not the case. The only way forward is to step change and automation, mechanization and digitization. In all my meetings with customers, this theme is often repeated. While integration is the way forward, the old monolithic style of heavy research and development spend, developing 'me-too' technologies, and competing on price is not entirely valid anymore."

Collaboration Underway

Technology development remains key for the future, and to that end, Weatherford plans to collaborate on automation, mechanization and digitization to "reduce friction costs while drilling a well, reduce personnel on site through automation, while creating a safer environment, and work on predictive maintenance programs that can make the production cycle super efficient...Today, Weatherford is in active discussions on many such collaborations."

Weatherford and Nabors Industries Ltd. on Wednesday announced they plan to partner in the Lower 48 states on enhanced oil and gas drilling solutions.

The last pillar of the strategy is to reboot Weatherford "with a back-to-basics agenda," he said. "We are wasting no time. Our day-to-day actions back these themes and is generating a new sense of purpose within the company."

The Swiss-based company, whose main operations are based in Houston, reported a net loss of $549 million (minus 59 cents/share) in 4Q2016, which was 55% higher than year-ago net losses of $1.208 billion (minus $1.54). Free cash flow from operations in the final quarter totaled $171 million. Operating margins improved sequentially by 273 basis points with 68% incrementals.

Revenue in the final three months rose 4% sequentially to $1.41 billion, led by North America and Middle East/North Africa/Asia Pacific regions. For 3Q2016, company posted a $1.78 billion loss (minus $1.98/share), with revenue plunging almost 40% to $2.24 billion.

North American revenue totaled $485 million in 4Q2016, down 31% from a year ago. Operating losses in the segment totaled $58 million in the quarter, 62% higher year/year. Operating margin was minus 11.9%, up 979 basis points (minus 21.8%) from 4Q2015.

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