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Weatherford to Retire 50% of Frac Fleet

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   |    Thursday,April 23,2015

Weatherford International plc reported a net loss before charges of $33 million ($0.04 net loss per share non-GAAP) on revenues of $2.79 billion for the first quarter of 2015.

In its conference call, Weatherford also hinted that it plans to retire a substantial portion of its frac fleet.

Bernard Duroc Danner, Chairman, President & CEO, commented: "I think by the end of Q2 we are very likely to have half of our fleet stacked, pressure pumping, simply because it is not economic to take on work at certain prices. End of story."

First Quarter 2015 Highlights:

• International operating income margins improved 120 basis points sequentially, led by Latin America and the Middle East/North Africa/Asia Pacific region;
• Free cash flow improved $426 million over the first quarter of 2014 and capital expenditures of $224 million ($194 million net of lost-in-hole) remain in line with our reduced full-year guidance;
• As of March 31, 2015, completed 81% of the initial 8,000 headcount reduction plan with realized annualized savings of $422 million; and
• Reduction in force target now increased by 2,000 to 10,000 employees.

Bernard J. Duroc-Danner, Chairman of the Board, President and Chief Executive Officer, stated, "We managed a difficult first quarter successfully with much better sequential decrementals of 34% compared with 49% in the first quarter of 2009.  This is due to the resilience of our international operations and margins as well as our aggressive cost reductions in the face of rapidly declining activity and pricing.  North America was very challenged and we believe the cost actions we have taken and will take in the second quarter will recover margins in the second half of the year.  Internationally, our margin improvement, both sequentially and year-on-year was best-in-class.  We more than offset activity and pricing headwinds with cost reduction initiatives while protecting our market share.  Our headcount at the end of the quarter dipped to 49,000 from 56,000 at the start of the year.  This is rapid progress.  Our current 18% headcount reduction goal for the year will leave us with about 39,000 employees in our core businesses and 6,000 rig employees.  We are focused on de-layering our organization structure and emerging from this down cycle a leaner, fitter and much more disciplined company, poised to improve margins with strong incrementals going forward."

First Quarter 2015 Results

Revenue for the first quarter of 2015 was $2.79 billion compared with $3.73 billion in the fourth quarter of 2014 and $3.60 billion in the first quarter of 2014.  First quarter revenues declined 25% sequentially and 22% from the prior year.  Excluding the impact of the 2014 divestitures, first quarter revenues declined 23% sequentially and 16% year-on-year.  Sequentially, activity and pricing reductions comprised the bulk of the revenue decline coupled with a stronger dollar weighing on the revenue of many countries, principally Venezuela, Russia and Canada.  GAAP Net Loss for the first quarter of 2015 was $118 million, or a net loss of $0.15 per diluted share.

After-tax charges of $85 million for the first quarter include:

• $35 million (pre-tax $41 million), primarily for severance costs related to our 2015 cost reduction plan;
• $26 million (pre-tax $26 million), due to the devaluation of the Venezuelan Bolivar;
• $14 million (pre-tax $18 million), net charges, including true-ups related to our 2014 divestiture activity and other professional fees; and
• $10 million (pre-tax $9 million), net of legacy contract and other charges.

Net loss on a non-GAAP basis for the first quarter of 2015 was $33 million compared to net income on a non-GAAP basis of $99 million and $252 million in the first and fourth quarter of 2014, respectively. 

Operating income margin declined 264 basis points compared to the first quarter of 2014.  Sequential operating income declined 57% during the first quarter with operating income margins declining 626 basis points in the first quarter to 8.5%.

Segment Highlights

Starting with this quarter, the regional results reflect the core Weatherford businesses while the Land Drilling Rigs business results are disclosed as a separate operating segment.  Prior period numbers have been reclassified to conform to the current presentation.

North America

First quarter revenues of $1.16 billion were down $606 million, or 34% sequentially, and down $447 million, or 28%, over the same quarter in the prior year.  First quarter operating losses of $10 million were down $296 million sequentially and down $213 million from the same quarter in the prior year.  The sequential decline in both revenue and operating income is due to the significant decline in the North American land rig count and pricing pressures that broadly impacted all product lines in the United States and Canada.  Sequential decremental margins were 48.8% as cost reductions did not keep pace with the activity and pricing declines, marginally worse than the 44.9% decrementals experienced in the first quarter of 2009.

International Operations

First quarter revenues of $1.44 billion were down $300 million, or 17% sequentially, and down $208 million, or 13%, over the same quarter in the prior year.  First quarter operating income of $238 million (16.6% margin) was down $30 million sequentially and improved by $15 million from the same quarter in the prior year, showing a 120 basis point and a 301 basis point improvement, respectively.  Sequential decremental margins were 9.7% as strong execution coupled with proactive cost reductions dampened the impact of activity and pricing declines, principally in Latin America and the Middle East/North Africa/Asia Pacific regions, faring materially better than the 47.5% decrementals experienced in the first quarter of 2009.

• Latin America

First quarter revenues of $486 million were down $178 million, or 27% sequentially, and down $23 million, or 5%, compared to the same quarter in the prior year.  First quarter operating income of $98 million (20.2% margin) was down $15 million, albeit with a 331 basis point improvement and up 7%, compared to the same quarter in the prior year.  The sequential revenue decline occurred primarily in Venezuela reflecting the change in exchange rates and lower activity in Colombia and Mexico.  The impact of these reductions were largely offset by strong cost reduction initiatives across all countries in the region, coupled with the reduction in dollar terms of local currency denominated costs in Venezuela, resulting in low sequential decrementals of only 8%.

• Europe/Sub-Sahara Africa/Russia

First quarter revenues of $417 million were down $80 million, or 16% sequentially, and down $99 million, or 19%, over the same quarter in the prior year.  First quarter operating income of $71 million (17.0% margin) was down $24 million, or 25%, sequentially with a 208 basis point decline and was down 9% when compared to the same quarter in the prior year.  The sequential decline in revenue and operating income was the result of activity related declines in the North Sea and the normal first quarter seasonality in Russia, coupled with the impact of the weaker euro, sterling and ruble.  Proactive cost reductions limited sequential decrementals to 30%.

• Middle East/North Africa/Asia Pacific

First quarter revenues of $533 million were down $42 million, or 7% sequentially, and down $86 million, or 14%, over the same quarter in the prior year.  First quarter operating income of $69 million (13.0% margin) was up 15% sequentially and up 30% from

the same quarter in the prior year.  The sequential decline in revenues is due to lower activity and a decline from the seasonally high fourth quarter product sales, mainly in Artificial Lift and Completion.  Geographically, the Asia Pacific region declined, primarily in Australia and China.  Operating income margins improved sequentially by 248 basis points and by 449 basis points year-on-year, with a higher dollar margin despite the revenue declines due to a favorable activity mix led by Formation Evaluation and Well Construction combined with cost reduction actions across the region.

Land Drilling Rigs

First quarter revenues of $195 million were down $27 million, or 12% sequentially, and down $147 million, or 43%, compared to the same quarter in the prior year.  First quarter operating income of $10 million (5.2% margin) was up $12 million sequentially and up $34 million from the same quarter in the prior year.  The sequential decline in revenues is attributable to seasonal impacts in China and lower activity in Australia while the year-over-year reduction reflects the divestiture of the Russia and Venezuela rigs during the third quarter of last year.  The operating income improvements were driven by better operating efficiency in the Gulf Countries and Oman.

Free Cash Flow and Net Debt

Free cash flow from operations consumed $266 million in the first quarter reflecting cash expenses of $58 million on the legacy Zubair contract in Iraq, $65 million in severance costs paid during the quarter and cash taxes and interest totaling to $259 million.  Capital expenditures of $194 million (net of lost-in-hole) in the first quarter were down sequentially by 49% and were down 21% versus the prior year quarter.  Working capital balances generated free cash of $37 million during the quarter, reflecting lower accounts receivables balances, a relatively flat inventory level largely offset by a significant pay down of accounts payable.  Although the free cash flow was negative, it improved compared to the first quarter of 2014 by $426 million and reflected tighter cash management efforts.  Net debt increased by $269 million sequentially, primarily in the form of increased short term borrowings. 

Outlook

Due to the rapidly changing market conditions, we will continue aligning and reducing our cost as well as organizational structures to match the new environment.  We have now increased our 2015 reduction in force exercise to target 10,000 positions, in place of the previously announced 8,000, with the bulk of the increase coming in North America.  By the end of the first quarter of 2015, 6,449 terminations had been completed resulting in expected annualized savings of over $422 million.  We expect to complete the entire revised program of 10,000 terminations by the end of the second quarter generating expected annualized savings of $640 million.  We had also planned to shut down seven of our manufacturing facilities during the year.  Of these, two were closed in the first quarter with four more planned for the second quarter and the seventh being targeted for closure in the third quarter.  Separately, we plan to shut down and consolidate 60 operating facilities across North America by the end of the year.  The procurement savings initiative is on track.  Over the next few quarters, we will continue to proactively review activity levels and rapidly adjust our direct and structural cost base as needed.

Looking ahead, we expect positive free cash flow in the second quarter to largely offset the consumption of cash in the first quarter with further reductions in working capital balances, reduced severance cash payments, a positive cash outcome on the Zubair project in Iraq as milestones are achieved and continued control of capital expenditures.  The full year forecast for capital expenditures has now been revised downwards by $50 million to $850 million which is 41% lower than 2014 levels.  We remain confident in our ability to generate positive free cash flow on a full year basis, with continued control over capital expenditures, reduction in working capital balances and managing a cash neutral end to the Zubair project in Iraq which will contribute enough to more than offset any reduction in earnings.

Bernard J. Duroc-Danner, Chairman, President and Chief Executive Officer commented, "Our international performance will be resilient.  Both Eastern Hemisphere and Latin America will show relative strengths through the 2015 market decline, and will outperform on margin growth.  North America will remain very challenged.  We are aggressively addressing direct and support costs company-wide, both in reaction to the market activity decline and for the company's long term transformation.  We are also working simultaneously to build our talent bench.  Our approach is to treat this down cycle as an opportunity to become a much leaner, more efficient and streamlined organization.  Our key focus areas of cost management, cash generation and talent development will pay dividends in improved market share, margins and reduced debt levels by year end."