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new york shock exchange
new york shock exchange

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Weatherford: Wipe Out Current Shareholders Or Go Belly-Up? PDF Print E-mail

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Weatherford International set off fireworks last week. The stock fell nearly 28% to $3.83 since earnings were released on October 25th. On Tuesday November 1st the stock was halted after certain analysts suggested the company sell assets or raise equity to shore up its balance sheet. Later that day the company confirmed its ability to meet covenants due to improving EBITDA and declining letters of credit balances. That said, it is difficult to take management at its word given its track record of not meeting expectations.

The Situation

The rout in oil prices has left Weatherford in dire straits. In Q1 2015 the company had free cash flow of -$263 million and a $7.8 billion debt load. A $395 million principal payment was due in Q1 2016 and a total of $1.5 billion due from 2016 - 2018. The company raised [i] $630 million in equity in Q1 2016 and [ii] $2.7 billion of normal debt and convertible debt in Q2 2016. The equity raise cured the $395 million principal payment, and the bond offerings all but eliminated principal payments from 2017 to 2019.

However, Weatherford continues to hemorrhage cash. It experienced cash burn of $147 million in Q3 2016 and over $540 million year-to-date. Its cash burn will likely worsen: [i] Q3 EBITDA of $68 million could not cover its $129 million interest expense; [ii] payments on a $140 million SEC fine for accounting fraud kick in next quarter and [iii] as the company grows it will have to fund rising working capital and capital expenditures.

Debt Covenant Breach Appears Imminent 

Certain of Weatherford's debt is subject to covenants, including its revolving credit facility and a tranche of its term loans. I understand that [i] specified debt was subject to covenants of debt/EBITDA of 3.0x and [ii] specified debt plus letters of credit ("LOC") were subject to covenants of debt/EBITDA of 4.0x. According to Weatherford, at Q3 its Specified Senior Leverage Ratio was 1.94x and its Specified Senior Leverage and LOC ratio was 3.67x.

The following chart outlines the company's leverage, leverage and LOC amounts and corresponding ratios for Q3 2016 and Q4 2016E. I reached out to the company for details on how it calculated its ratios through September but I did not receive a reply.

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By my calculation the company's last 12 months ("LTM") EBITDA through Q3 2016 was $414 million. Q4 2016E revenue of $1.45 billion was derived from Yahoo. I applied a 5% EBITDA margin (same as Q3 2016) to estimate Q4 EBITDA of $73 million.

  • Q4 2016E EBITDA is $254 million.
  • Actual leverage and actual leverage plus LOC amounts were $803 million, and $1.519 billion at Q3. I interpolated these amounts based on the leverage ratios provided by management and the $414 million LTM EBITDA through Q3.
  • Q4 2016E maximum leverage and maximum leverage plus LOC would be $761 million and $1.015 billion, respectively.

To comply with its debt covenants the company would have to reduce leverage by $42 million ($803 million actual leverage at Q3, less $761 million maximum leverage). It would have to reduce leverage plus LOC amounts by $504 million (actual of $1.519 billion at Q3, less maximum of $1.015 billion).

Does Weatherford Need A $1.1B Capital Raise?

Weatherford could either get a waiver from its lenders or raise more capital to avoid breaching its debt covenants. A waiver would not solve the company's long-term problems. Weatherford simply has too much debt. Its $7.5 billion debt load is 18x LTM EBITDA and nearly 30x 2016E EBITDA. It's quarterly EBITDA cannot cover its interest expense and a waiver will not change that.

After borrowing another $265 million in debt in Q3 the company has $440 million in cash on hand; at its current cash burn rate of approximately $150 million per quarter, Weatherford could go belly-up by the first half of 2017. It might behoove lenders to pull their debt now or risk not be repaid at all.

That said, if Weatherford could sell assets then it likely would have done so already. Asset sales are even more difficult given that the company is insolvent by over $3 billion. A meaningful equity raise could be used to cover [i] four quarters worth of cash burn ($600 million) plus [ii] the $504 million needed to comply with debt covenants. WFT trades at $3.83 -- over 30% below the $5.65 share price for its Q1 2016 equity offering.

Such a large equity raise could cause WFT to plummet. It could be highly-dilutive given the company's current market capitalization of $3.45 billion; it would not cure the company's $3 billion insolvency; it could potentially brandish Weatherford's image as oil's Bernie Madoff -- constantly having to attract new investors to repay old ones.

Conclusion 

A covenant breach is an imminent threat to Weatherford. The company could execute a sizeable equity raise, which could wipe out existing shareholders, or continue to burn cash until it goes belly-up. Avoid the stock. 

 

 

 

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