EUR 850.00 For Business Accounts Only

Morningstar | Weatherford's 3Q Disappoints Investors as Company Is Still Not Paying Down Debt

Investors were clearly disappointed in the wake of Weatherford's third-quarter results that the company is still not paying down its large debt load, with the company's shares falling around 30% (from about $2 per share to about $1.40). Net debt increased to $7.6 billion at the end of the quarter from $7.5 billion at the beginning. Previously, management had indicated that about $500 million in "onetime cash benefits" (mostly working capital reductions) that would begin allowing the company to pay down debt through the second half of 2018. However, working capital remained flat through the third quarter, essentially causing the continued debt build-up.

Notwithstanding this disappointment, we were impressed by another strong quarter in terms of overall performance. Although revenue was flat sequentially (owing to the same activity headwinds afflicting peers), Weatherford's adjusted operating margins increased to 5.9% from 2.4% previously. Over half of the bottom-line improvement was due to the company's transformation plan, which includes a variety of cost-cutting and revenue-boosting initiatives. All together, the transformation plan has thus far achieved about 30% of its targeted $1 billion in annualized operating income improvements.

We may notch our fair value estimate down slightly after fully reflecting upon recent results for two reasons. First, we are concerned that investor pressure for immediate cash flow generation may lead to value-destructive decisions (such as asset sales below fair value or underinvestment in positive-NPV projects). Additionally, we are concerned that flat revenue since mid-2017 is indicative of the company sacrificing market share to gain on pricing (select price hikes have been part of the "sales/commercial" portion of the transformation plan).

However, we don't plan on joining the market panic and dramatically lowering our fair value estimate. We think the transformation plan will continue to play out through 2019, allowing Weatherford to comfortably clear the hurdle ($1 billion in annualized EBITDA) that management had indicated is requisite for the company to begin paying off debt.