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Bruce W. Kaser, CFA
By
July 05, 2019

Our Current Outlook on Weatherford Stock

One of our members recently enquired about our thoughts on Weatherford shares, and we thought the note below might be of interest to you. 

Bruce Kaser, our head of equity research, shares his current outlook on Weatherford shares.

 

Thanks for being a subscriber and for your good question. Our thoughts on Weatherford's equity are based on how the new, post-exit shares might look after the company emerges from bankruptcy. The current shares will likely become worthless, so we are not interested in buying shares while Weatherford is in the bankruptcy process.

 

Based on our preliminary analysis, Weatherford new post-Ch 11 exit shares could be interesting. We generally like the big-picture story: OK operations with a much better balance sheet.

 

However, it is too early to do much analysis, as there still could be a lot of changes to the plan as filed – bankruptcy filings can produce heated negotiations that render the final plan unrecognizable compared to the original plan as filed in the Disclosure Statement. Also, if the negotiations are protracted, stock market and business environment conditions can meaningfully change (especially in the oil industry) the appeal of the post-exit shares.

 

Given that, we think the plan as outlined makes the stock worth a look:

  • Management and board of directors – usually we want to see a new management and board of directors, as the team that got a company into a Chapter 11 situation is probably not best-suited to lead it post-exit. However, with Weatherford, retaining the current management team is a positive. CEO McCollum is very capable and made impressive operational improvements, under duress, with a situation that he inherited. Being a former CFO, he almost certainly would have understood and accepted the risk of a possible bankruptcy filing when he joined the company two years ago.

  • Operational outlook – Weatherford still is operationally in transition from a loosely run confederation of unintegrated acquisitions into a unified and efficient business. While we believe the management team will eventually complete the operational turnaround, there are still many moving parts with possibly more divestitures, along with the very difficult industry conditions (pricing pressure and flattening amount of work combined with rising costs) that make reaching this goal very challenging. A sharp and sustained drop in oil prices, for example, would likely overwhelm its turnaround efforts.

  • Business franchise – Weatherford has a decent base of loyal customers but not to the extent of Halliburton and Schlumberger. We don’t consider their franchise to be solid.

  • Balance sheet – The current plan cuts the debt to about $2.5 billion, roughly 3.4x the consensus 2019 EBITDA estimate of about $740 million. This is above its peers Halliburton at 3.0x and Schlumberger at 2.5x. Given that a post-exit Weatherford will not have the same strategic strengths as its two larger peers, its higher debt level will continue to exert pressure on its operational and financial flexibility. The plan’s financial projections show Weatherford producing $889 million in EBITDA in 2020 and $1.0 billion in EBITDA by 2021. If it attains these goals, the company’s debt load would be readily manageable. The current plan shows that the $2.5 billion in notes mature in 2024 and 2026, plenty of time for the company to complete its operational turnaround.

It appears that the post-Ch 11 Weatherford shares will be listed on a major exchange, but we’ll have to wait for details on this. Since 99% of the new equity will be in bondholder hands, any trading volume could be very thin. Fortunately, however, we would expect these bondholders to steadily sell down their new equity in the public markets (depending on trading volume, etc), which would provide an extended opportunity to buy shares at what could be a depressed valuation. Based on the plan’s valuation analysis, the company’s enterprise value/EBITDA would be about 4.1x at the mid-point of the provided range. This is a large discount to HAL (at 6.6x) and SLB (at 9.0x) but probably fair given Weatherford’s overall condition.

 

Best regards,

Bruce

 

Bruce W. Kaser, CFA

Head of Equity Research

New Generation Research

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Fortunately, however, we would expect these bondholders to steadily sell down their new equity in the public markets (depending on trading volume, etc), which would provide an extended opportunity to buy shares at what could be a depressed valuation. Based on the plan’s valuation analysis, the company’s enterprise value/EBITDA would be about 4.1x at the mid-point of the provided range.