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Weatherford's Failed $540MM Equity Raise Appears Ominous PDF Print E-mail

Image Weatherford (NYSE:WFT) received a boost last week after hiring Mark McCollum, former Halliburton (NYSE:HAL) CFO, as its new CEO. The market went wild with speculation of a potential tie-up between the two oil services giants. WFT reached a high of $7.09 last Tuesday and closed yesterday at $6.32. My previous article predicted the stock appreciation would trigger another capital raise:

Last month Weatherford filed a $2.5 billion shelf registration for warrants ($543 million) and other securities ($2 billion). The warrants have an exercise price of $6.43 per share, and 84.5 million shares are issuable. After-hours WFT closed at $6.50; if the share price holds on Tuesday then the warrants would be in the money, and could trigger another equity raise.

The exercise of the warrants could have been dilutive by about 8%. I expected WFT to decline due to dilution from the warrant exercise. However, the warrants were not exercised.

The Situation

Weatherford amassed billions in debt to fund acquisitions and capital expenditures when oil prices were above $100. The rout in oil prices have hurt the company's cash flow, and rendered it unable to service its $7.5 billion debt load. In 2016 Weatherford raised over $4 billion to fund operating losses and push back near term principal payments. I still estimate the company is insolvent by about $4 billion, which implies that its capital needs will not end anytime soon.

In addition to the warrants Weatherford has $1.3 billion of debt convertible to equity at $7.74 per share. Management plans to pare debt by $3 billion over the next four years, and expects capital garnered from the exercise of the warrants and conversion of the debt to help it accomplish that goal:

We will reduce our net debt to below $3 billion over the next four years ... There are two equity-linked structural reductions that will occur over time. Firstly, we issued share warrants to an investor last November granting the investor the right to purchase up to 84.5 million shares at a strike price of $6.43 ... we believe these warrants will be in the money in 2017, and will likely be exercised, giving us an additional equity injection of $543 million.

Next, we expect the convertible debt issued in June 2016 to convert into equity in 2021. The conversion price is $7.74, which should be reached in this intervening timeframe ... we will issue equity shares against this convertible debt in 2021, and reduce our debt by $1.3 billion.

For each of the past five trading days the warrants traded in the money, yet investors did not exercise them. With the Fed expected to hike rates, and oil now sub-$50, financial markets could head lower and take WFT with it. The stock might not reach the $7.74 conversion price for the convertible debt. Even if it did there is no guarantee debt holders would convert to equity. The better investment choice could be to collect their principal and interest rather than taking an equity position in an insolvent company.

Is The Failed Equity Raise An Ominous Sign?

Again, the exercise of the warrants could have provided Weatherford with addition equity capital of $543 million. I view investors' decision not to exercise as a failed capital raise. It could portend that Weatherford's future capital-raising ability could be in jeopardy. It makes sense that investors could be hesitant to pony up more money. First all, a $543 million equity raise would not solve the company's structural problems; the additional equity would only reduce Weatherford's insolvency to about $3.5 billion. Any new money might get diluted from future capital raises needed to cure the company's insolvency.

Secondly, the company is still hemorrhaging cash. Its Q4 EBITDA was $67 million, yet its quarterly interest expense was $136 million, up from $129 million in Q3. Its $7.5 billion debt load appears untenable at over 30x EBITDA. Until the company can generate enough EBITDA to cover its interest expense then [i] its cash burn will likely continue and [ii] investors could be throwing good money after bad. Weatherford might get an earnings boost in Q1 2017; however, the oil patch remains cut throat and I do not envision the company's EBITDA improving enough to cover its heavy interest burden.

Conclusion

Weatherford's failed equity raise appears ominous. Sans new money I estimate it will not be able to cure its insolvency, and it could go belly-up sooner than anticipated. WFT remains a sell.

 

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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