On Monday, after-hours, Weatherford International (NYSE:WFT) filed a $2.5 billion mixed securities shelf registration. The company seeks to issue: 1) 84.5 million shares at a proposed maximum offering price of $6.43 per unit for a proposed offering of $543 million, and 2) up to $2 billion in debt or equity securities.
Description of Warrants ($543 Million)
The 84.5 million shares are issuable upon the exercise of a warrant at an exercise price of $6.43 per share. The warrants were issued in November 2016 and are exercisable any time on or prior to May 21, 2019. Upon exercise of the warrant, the warrant holder will pay Weatherford $543 million. If the warrants are exercised, it would increase the company's share count from 982.8 million to 1.067 billion. In effect, the event would be dilutive to existing shareholders by about 8%.
Weatherford represented that its net tangible book value at year-end 2016 was -$977 million. The additional capital would increase tangible net book value to -$434 million. The holder of the warrants also bought $450 million worth of WFT shares in November. Weatherford used the funds from the equity offering, along with a $540 million debt raise, to shore up its balance sheet and avoid a potential covenant breach.
Description of Other Securities (Up to $2 Billion)
In addition to the ordinary shares issuable upon exercise of the warrants, the company is registering an indeterminate amount of ordinary shares, options, warrants and debt securities. The initial offering price of the new securities once issued shall not exceed $2 billion. In effect, the registration gives Weatherford the leeway to raise another $2 billion.
Weatherford Is Thirsty for Capital
Weatherford has been losing money for several quarters. In 2016, it raised over $4 billion to fund operating losses, make principal payments and push back other principal payments out to 2019. However, the company remains in dire straits. I estimate it is insolvent by about $4 billion. The company's $7.6 billion debt load is at 30x EBITDA; it is highly improbable Weatherford will be able to service debt via current cash flow.
Secondly, its quarterly EBITDA of $67 million is dwarfed by quarterly interest expense of $136 million. While EBITDA growth remains stagnant, the carrying cost on its debt is growing. Q4 interest of $136 million was up from $129 million in Q3. As each quarter goes by, the company is destroying value.
In June 2016, Weatherford also issued convertible debt that converts into equity in 2021 at a conversion price of $7.74. The company expects the stock to reach the conversion price within the specified time frame, and it expects to issue equity shares against the convertible debt and reduce debt by $1.3 billion.
Shelf Registration Could Trigger More Dilution
There is no guarantee WFT share price will rise high enough to trigger a conversion of the warrants or convertible debt. If the warrants were exercised and the company garnered another $543 million in equity capital, it would have given the company about $1.7 billion in cash. Odds are that Weatherford still would have had to return to the capital markets. I believe its $136 million in quarterly interest charges would have eroded the company's capital base eventually.
The $2 billion shelf registration gives Weatherford the flexibility to raise capital whether or not the warrants are exercised or the convertible debt is converted to equity. If the new capital takes the form of equity, it could be highly dilutive to current shareholders. Ultimately, the company is thirsty for new capital. The worst-case scenario is that future capital raises will be more dilutive than the 8% implied by the warrant exercise.
Another highly dilutive event is likely for Weatherford. I do not believe the company can survive without it. Avoid the stock.
Disclosure: I am/we are short WFT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.