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"Oil's Bernie Madoff" Could Burn Another $200 Million PDF Print E-mail

Image Weatherford International (NYSE:WFT) reports Q4 earnings Thursday. Analysts expect the company to deliver revenue of $1.42 billion and eps of -$0.34. Since Q1 2016 Weatherford has raised $4.3 billion in equity and debt securities in 2016 to help cure near term principal payments, fund cash burn and shore up its balance sheet. Its penchant for "robbing Peter in order to pay Paul" could burnish its reputation as Oil's Bernie Madoff. Despite the capital raises, Weatherford's debt never seems to go away. Its debt at Q4 2015 and Q3 2016 was $7.4 billion and $7.5 billion, respectively.

Its quarterly EBITDA of $68 million does not cover its $129 million quarterly interest expense. This portends more cash burn ahead. Weatherford experienced cash burn of about $150 million in Q3. I believe the company could burn $200 million or more this quarter:

  • Interest expense above and beyond EBITDA could be another $58 million. This assumes a 5% increase in EBITDA to $71 million, and interest expense of about $129 million.
  • A $50 million installment payment was due in December pursuant to the company's $140 million SEC fine for accounting fraud. That payment should hit the books this quarter.
  • The company spent about $62 million in capex in Q3. I assumed another $62 million would be spent this quarter.
  • Weatherford experienced cash outflow of $124 million from the pare down of accounts payable. I expect more short-term creditors to pull the reins. Certain of the company's vendors have demanded cash payment up front, given Weatherford's financial predicament. The company had payables of $660 million at Q3 2016. If these short-term creditors cut their exposure en masse then Weatherford might have to return to the capital markets by the end of Q2 2017.

Asset Impairment Charges

In Q3 the company incurred after-tax charges of $1.43 billion, including 1) $719 million related to impairment of long-lived assets, inventory write-downs, and accounts receivable, and 2) $683 million of tax valuation allowances. Investors should brace themselves for more write-offs this quarter. The company has $3.1 billion in goodwill and intangibles related to acquisitions made when oil prices were much higher. About $1.8 billion of goodwill is attributed to North America operations; over the last 12 months North America has reported EBITDA of -$152 million, and that is prior to corporate allocations. I anticipate a sizeable goodwill impairment charge this quarter.

I believe Weatherford's total assets are overstated by over $6 billion. The company lists Q3 2016 assets of $12.6 billion. If the assets were really worth that then why would it constantly need to raise capital from outside sources? In particular, its $4.7 billion PP&E could be overstated by at least $2 billion. The market for machinery, equipment and oil rigs is not robust right now. I believe this will also be an area of focus by the auditors this quarter.

International Could Be A Headwind

Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) have each reported robust revenue growth in North America. The rig count was up 23% and Weatherford could report double-digit revenue growth from the region. However, international will likely be a headwind. The reduced rig count in Brazil and the financial calamity in Venezuela could cause revenue from Latin America to fall. Meanwhile, Europe could get hit by reduced drilling activity in the North Sea.

Weatherford receives 33% of its revenue from North America and 67% from international. If international revenue declines then the company could be hard pressed to deliver 4.4% sequential revenue growth, regardless of what North America does.


In addition to more cash burn Weatherford could miss its revenue target. Avoid WFT into earnings.


On Shock Exchange 

With the critically acclaimed, Shock Exchange: How Inner-City Kids From Brooklyn Predicted The Great Recession And The Pain Ahead, author Ralph W. Baker, Jr. predicted the current global economic slow down, the demise of China, emerging markets and the pending stock market crash.

Where to Buy:

"Shock Exchange" is available electronically through Barnes & Noble (NOOK), Amazon (Kindle), iTunes, etc. The print version is available through the following retailers and bookstores:  

Print Version: 

Amazon http://www.amazon.com/

Barnes & Noble online http://www.barnesandnoble.com/

Hampden-Sydney College Bookstore: http://cougar.hsc.edu/cgi-bin/main_inv.exe , item number: 38561. Or call Jason Huskey at 434-223-6117.   



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