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Weatherford Cuts 1,000 More, Mostly in U.S., Following Crushing Quarter

Weatherford International plc is laying off another 1,000 people, mostly U.S. support staff, to deal with an energy industry that is "substantially underfunded and substantially underinvested," CEO Bernard J. Duroc-Danner said Thursday.

The fourth-largest global oilfield services operator had issued layoff notices to about 10,000 people a few months ago, reducing its workforce by 18% (see Shale DailyApril 23). The new layoffs increase that total to 20%. At the start of the year, Weatherford had 56,000 employees worldwide. The latest cuts bring the workforce to 39,000.

The job losses follow a second quarter loss of $489 million (minus 63 cents/share), mostly on the downturn in North American (NAM) business. Revenue fell 14% to $2.39 billion, while operating income was down by half at $117 million. The operating income margin fell to 4.9%, minus 365 basis points (bp), from 8.5% a year ago.

NAM revenues plunged by half to $808 million, while operating losses totaled $92 million, down 846%. The operating loss margin was minus 11.7%, or minus 1,061 bp, from operating profit margins of 15.3% a year ago.

"While our cost reduction efforts were aggressive, they could not keep pace with the drop in revenue," CFO Krishna Shivram said. "However, they did cushion sequential decremental margins, which came in at a low 23%, about half of what they were during the previous downcycle of 2009 and less than half of the first quarter decremental to 49%."

For Weatherford, "North America is the issue in 2015," said Duroc-Danner. "As a synthesis, the oil industry is substantially underfunded and substantially underinvested. At current prices, the industry will be challenged to deliver needed oil supplies in 2017. This means oil demand will not be met by oil capacity by 2017, which is unthinkable. We're quite sure of this."

However, notwithstanding the pressure on the market, Weatherford doesn't plan to "wait for better times," said the CEO.

"The present state of the industry depression offers great opportunities. We will position Weatherford with selected markets and clients. We use a brutal recession to gear up in cost, culture and talent capabilities that will be a strong upward cycle for required capacity expansion."

Duroc-Danner said his assessment is "the best...we can provide for the second half of this year. Our international performance will be resilient. NAM will remain challenged, but gradually [be] more constructive."

The market today is the kind in which the company can make "fast and deep cost progress and structural changes to effectively redirect the culture and rebuild a strong bench."

The CEO also gave marching orders to the field operators to focus on well integrity, lower drilling/completion costs and ensure sustained production rates.

"We do not have a strategic need to add or change our product line, breadth or depth," he said. "Our measurement of success will not be sized in an attempt to emulate some of our larger peers. Our path takes us toward operating excellence and a strict focus on our industrial mission. We can grow and prosper as we are to the great benefit of shareholders and clients."

This is a market that offers "an opportunity as much as a punishment," Duroc-Danner said.

Few people are "knocking on anyone's door when it comes to pressure pumping in the U.S.," he said. "I think this is No. 1...We tried to be as brutally realistic about what we need to do as we can."

Weatherford, he said, has learned to run its pressure pumping unit better than it had been, but it's not evident in the numbers "because the market is not good. It's vastly oversupplied. You know all of this," he told analysts during the call.

As he said in April, geography explained the quarterly results, with the international business continuing to do well and NAM deteriorating further.

"Our second quarter earnings loss were all about NAM. It is the market, of course, but also a U.S. operation historically less efficient than the international segment and not as well positioned. We have more of a land position in the U.S. In the U.S. today, offshore is only 15% of the region's revenues, which is half what it should be.

"This isn't inevitable, it wasn't the case historically and isn't desirable. Land, of course, was order of magnitude weaker than the Gulf of Mexico."

Weatherford's client base in the United States also isn't the Tier One group, controlled mostly by Schlumberger Ltd., Halliburton Co. and Baker Hughes Inc.

"This isn't desirable or inevitable either," he said. "This isn't at all the case internationally or in Canada. The second tier and third tier clients have dropped their activity much faster and further than Tier One."

The United States traditionally has acted as a moderating factor in down cycles, but that's not the case now, said Duroc-Danner.

"The U.S. is changing, and in all its segments. Land exposure, client mix and cost structure all are being addressed as thoroughly and as fast as we can. Coming out of this recession, our NAM segment will be an entirely different operation. We'll also add that North America reached, in the course of 2Q2015, what we believe will be its low point this year."

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