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Weatherford Toning Up, but U.S. Drilling Activity Weighs in 3Q

Seasonal improvements in Canada and stronger activity overseas could not offset a drop-off in U.S. activity during the third quarter, but a transformation is taking effect as Weatherford International plc uses muscles it’s never used before, the CEO said Monday.

The No. 4 oilfield services company reported net losses of $199 million (minus 20 cents/share) in 3Q2018, versus a year-ago loss of $256 million (minus 26 cents). Revenue was flat sequentially and down 1% from a year ago at $1.44 billion.

“Our progress this quarter has not come without some bumps in the road,” CEO Mark McCollum said during a conference call to discuss results. “Revenue was flat sequentially versus our expectations and mid-single-digit growth.

“Some of the variant was created by our own choices, such as where revenues were decreased when we started turning down unprofitable contracts. But we also experienced transitory supply chain issues in manufacturing inefficiencies that decrease top-line results during the quarter.”

After McCollum took the helm last year, he launched a company-wide overhaul, vowing to sell off unprofitable businesses and improve efficiencies. The global operator has been ceding ground as of late to Schlumberger Ltd. and Halliburton Co.

However, there were bright spots for Weatherford in the latest period, particularly as they relate to the transformation.

Operating income climbed by $123 million year/year (y/y) and was up 68% sequentially, driven by higher margins across all of the product lines and improved efficiencies following the broad transformation program begun last year. Corporate costs fell to $31 million from $34 million in 2Q2018.

Transformation initiatives delivered recurring benefits of $27 million in 3Q2018, which combined with the amounts realized during the first half of the year put Weatherford at an annualized gross earnings run rate of about $300 million, or about 30% of its overall goal.

“Our progress reflects the discipline and accountability now being ingrained in our organization,” McCollum said. “I am confident that, having achieved approximately 30% of our annualized transformation goal, we will reach our $1 billion run-rate improvement target by the end of 2019. I believe we are just starting to see what this company is capable of."

Weatherford “fell short of our revenue and cash flow goals, due in large part to transitory supply chain and manufacturing inefficiencies as well as continued challenges converting inventories to cash,” McCollum said. “We remain intensely focused on generating free cash flow and on reversing these trends."

The transformation is not designed “to solve small problems one time and then move on. In order for this massive integration program to be successful, each item, each process must be evaluated to drive out systemic inefficiencies causing us to waste time and money.”

From the sales organization to the payroll department, he said, “we're working to rectify historical issues. Transformation is hard work, and the organization is using muscles it's never used before. However, I see the results first hand everyday. As we progress, I'm confident we're solving issues more quickly and finding additional opportunities for improvement beyond our original scope.”

As it continues to whittle off excess fat, Weatherford agreed earlier in October to sell its laboratory services business, including geological analysis and contracts, to a group led by CSL Capital Management LP for $205 million. The transaction is expected to close before the end of the year.

The sell-off of what were once core assets is shrinking the company to not only reduce debt but also refocus the portfolio on core businesses most closely aligned with its long-term strategy.

"The recent announcement of the sale of our laboratory services business earlier this month, combined with the previously announced land drilling rigs divestiture, will generate close to $500 million in cash proceeds, which will be used to reduce debt,” McCollum said.

Still, the Swiss-based company, whose major operators are housed in Houston, no longer plans to box itself in by putting a timeline on planned divestitures, CFO Christoph Bausch said.

“Current market conditions are not conducive to us setting specific sales proceeds or timing targets for the remaining transactions, although we continue to work to sell individual noncore product lines, market our remaining land rigs and divest other small assets and businesses. We remain committed to focusing on our core businesses and further delivering our company, and we will not enter into deals at terms that are inconsistent with these strategic objectives.”

That said, Weatherford does not expect to see much progress toward improving the bottom line in the final three months of this year, in part from withering exploration and production (E&P) spending.

“In the fourth quarter of 2018 we expect total revenues to be relatively flat compared to the third quarter,” Bausch said. Typical product sales “are likely to be offset by stalling activity levels in the United States, where we expect some declines at the end of the year related to remaining E&P budgets and typical holiday and weather delays.”

On a y/y basis, higher revenues in 3Q2018 associated with integrated service projects in Latin America were offset by lower activity levels in Canada as crude oil differentials expanded, which reduced demand for completions/production services and products.

During the quarter, Weatherford recorded pre-tax charges of $95 million, including $71 million in one-time impairments and asset write-downs, primarily related to land drilling rigs; $27 million in restructuring/transformation charges; and $8 million in currency devaluation charges.

Net cash used by operating activities was $32 million for 3Q2018. Third quarter total capital expenditures of $55 million, including investments in held-for-sale land drilling rigs, increased by $7 million, or 15%, sequentially but fell by $10 million, or 15%, from 3Q2017.

In Western Hemisphere operations, which include North and Latin America, quarterly revenue of $762 million declined $7 million, or 1%, sequentially and fell by $5 million, or 1%, y/y.

Operating margins in the Western Hemisphere unit were 10.2%, up 373 basis points (bps) sequentially. Canada revenue improved sequentially as the rig count increased following the spring breakup, but the improvement was offset by lower results in the United States and negative foreign exchange impacts in Latin America.

Y/y revenue increases from integrated service projects in Latin America were dinged by lower activity levels in Canada as crude differentials expanded, which reduced demand for completions/production services and products.

Third quarter segment operating income in the Western Hemisphere unit was $78 million, up $28 million sequentially and up $75 million from a year ago. The sequential increase benefited from lower expenses and improved operating efficiencies mostly associated with the transformation underway. Y/y improvements were driven by a combination of higher activity levels in Argentina and Mexico, as well as positive impacts from the transformation efforts, which overcame lower operating results in Canada and foreign exchange effects in Latin America.

In the Eastern Hemisphere business, revenue totaled $682 million in 3Q2018, nearly flat sequentially. Operating margins of 5.6% were up 277 bps sequentially. Stronger revenue in Continental Europe and Asia because of higher product sales were offset by lower services activity in the Middle East.

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