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Morningstar | Slightly Lowering Weatherford FVE Due to Financial Distress Risk

We are lowering our fair value estimate for Weatherford to $1.75 from $2 per share, primarily due to heightened financial distress risk, which we have reflected in a slightly increased cost of capital. We have also slightly lowered our near-term profitability assumptions to reflect possible operational disruptions (loss of customers, for example) due to financial distress risk. Our no-moat rating remains unchanged.

Although we think the risk of bankruptcy remains remote, shareholders could lose if Weatherford struggles to maintain access to credit markets in coming years as it seeks to roll over its debt. This could cause the company to tap into equity markets, which would be destructive to shareholder value given that shares are currently trading far below our $1.75 fair value.

We expect Weatherford to generate about $700 million in free cash flow in 2019 even without further asset sales, more than enough to cover its $600 million in interest expense. The company has about $300 million in short-term debt (the 364-day credit agreement) coming due in August 2019, but Weatherford could shift this obligation onto its untapped A&R credit agreement, which does not mature until July 2020. Altogether, Weatherford has about $3 billion in maturing debt from 2020 to 2022, at least some of which it will need to roll over. Although we expect its profitability to look much better during that period, there is still some risk that the company struggles to roll over its debt, which is why we are taking a more conservative stance.

We are still quite optimistic about the company's long-term prospects. Even with our extreme uncertainty rating, Weatherford looks like a compelling buy, with the company's shares trading around 65% below our fair value estimate.