Tasked with turning around Weatherford International plc, CEO Mark McCollum said Wednesday challenging days still are ahead as management restructures and casts off dead weight.
McCollum, who came aboard earlier this year, and CFO Christoph Bausch led a conference call on Wednesday to discuss third quarter results for the fourth largest oilfield services operator in the world.
Weatherford, which has been bleeding for many quarters, made incremental progress in 3Q2017. Net loss in 3Q2017 totaled $256 million (minus 26 cents/share), versus a year-ago net loss of $1.78 billion (minus $1.98). Revenue totaled $1.46 billion, up 8% year/year and 7% sequentially, on operating income of $34 million, a sequential improvement of 187%.
“Our roadmap forward involves more than just cutting costs,” said McCollum, who took over after serving as CFO for Halliburton Co. “We are realigning the segments of our business and emphasizing process, discipline, integration and collaboration across our organization.” There’s also “huge potential” to improve sales efforts and gain more market share.
The first step, McCollum said, is a revised organization to unlock standardization and drive process improvements to align product and service offerings from the product lines with its major businesses: drilling/evaluation, completions, well construction and production, which includes artificial lift, drilling fluids and pressure pumping.
“The changes we're making go far beyond headcount reductions,” McCollum said. “We've made cuts before. What's different this time is that we have removed an entire layer of the organization at a much higher level than in the past. We're not trying to become skinnier; we're making the organization flatter.”
Operating margins reversed from year-ago losses to 2.3% (512 basis points) from minus 8.2%.
In North America, sequential revenue climbed 13% on a higher average U.S. land rig count and a seasonal recovery from Canada’s spring break-up.
North American gains primarily came from artificial lift, well construction and completions business units. Weatherford was also awarded a two-year contract for managed pressure drilling services on rigs across the Gulf of Mexico, including operations in the United States, Mexico, and Trinidad and Tobago.
“Efficiency is king, and to achieve step changes in efficiency we need to look beyond our standard solutions set,” McCollum said. “There's real business case for instance for digital transformation. We can see its impact in other industries, and we're now starting to grasp the benefits of these technologies in the oilfield.”
Weatherford is “driving change as fast as we can,” but evidence of the work in progress may not be evident before fourth quarter results.
“Some things will require a longer time horizon, obviously. We're pushing for transformational change with a target of $1 billion in profit improvements over the next 18 to 24 months,” the CEO said. “From this point forward, it's all about delivery.”
Weatherford has tied part of its fortunes to more joint ventures (JV). In March it announced a game-changing OneStim partnership with Schlumberger Ltd. to capitalize on the recovery in North American unconventional land. Schlumberger is combining its 2 million hydraulic hp (hhp) with Weatherford’s 1 million hhp, creating the second largest fracturing fleet in North America after Halliburton. The deal is set to close by year’s end.
To “correct misguided market speculation” regarding the JV, McCollum said the agreement still is set to be completed before the end of the year.
“We have good equipment and a lot of horsepower ready to get to work,and I believe OneStim will be a very welcome addition to the competitive North American land market,” he said.
Weatherford is considering whether to sell off assets or rework them.
An internal analysis indicates “there's a lot more value to be gained by first fixing the business as we have before putting any of them up for sale,” McCollum said. The restructuring efforts we're putting in place will make a tremendous difference. There's a dramatic amount of value creation there…”
Besides, he said, the current merger/acquisition market “is not very attractive from a seller's perspective. So we're going to work on improving the business and keep our options open with regard to larger potential transactions for the time being.”
Following the strategic review in the last three months, Weatherford has identified several businesses not already up for sale that “are not critical to our strategy going forward and we think we can create more value for other owners or we think these businesses can create more value for other owners.
“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.”
The “overall priority” is fixing the balance sheet and moving the company down a path of sustainable free cash flow McCollum said.
“An over-levered balance sheet coupled with the lack of cash generation has been...around Weatherford's neck and we need to break free from it.
“Financially, our debt causes a cash strain on everything we do and would like to do. Assuming no market recovery, our goal is to cut our debt to [earnings] ratios by more than half by the end of 2019. Ultimately, the long-term goal is to return to an investment grade rating.”