Weatherford International: All Eyes On Deleveraging And Russia

Aug. 09, 2022 10:50 AM ETWeatherford International plc (WFRD)

Summary

  • WFRD's Q2 2022 top line and bottom line came in above expectations, and the company performed well for its key product and geographic segments.
  • I like how Weatherford is managing a good balance between deleveraging and reinvesting for future growth, but I would have preferred that WFRD exits from Russia completely.
  • I reduce my rating for WFRD from a Buy to a Hold, as the key re-rating catalyst relating to the Nasdaq relisting has already materialized.
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SimonSkafar

Elevator Pitch

I downgrade my investment rating for Weatherford International's (NASDAQ:WFRD) stock from a Buy to a Hold. I specifically highlighted the Nasdaq relisting re-rating catalyst for Weatherford in my earlier article written on May 17, 2021. With this catalyst having already been realized, I provide an update of my views on WFRD with this latest article.

Weatherford's recent quarterly financial results were decent, but there is an absence of new catalysts for the name which justifies a Hold rating. Also, I will want to observe WFRD's future moves in relation to deleveraging and the Russian market, before turning bullish or bearish on the stock. This explains my Hold rating for WFRD.

Key Financial Metrics For WFRD

Weatherford delivered a very strong set of financial metrics for the most recent quarter.

As indicated in its Q2 2022 financial results media release published in late-July, WFRD's top line increased by +13% QoQ and +18% YoY to $1,064 million.

More importantly, Weatherford's performance in the recent quarter was good across the different geographies and various product lines. In the second quarter of 2022, the company's revenue derived from Latin America, North America and MENA (Middle East and North Africa) & Asian markets, grew by +29%, 22% and +21% YoY, respectively. Separately, revenue generated by Weatherford's Production & Intervention, Drilling & Evaluation, and Well Construction & Completions product segments increased by +24%, +20%, and +14%, respectively, in the most recent quarter.

WFRD also turned around from GAAP net loss per share of -$1.11 for Q2 2021 and -$1.14 for Q1 2022 to achieve a positive GAAP EPS of $0.08 for Q2 2022. This was supported by a substantial expansion in Weatherford's operating profit margin. The non-GAAP adjusted EBITDA margin for WFRD was 17.5% for the second quarter of the current year, which was equivalent to a +1.4 percentage point QoQ improvement and a +2.4 percentage point YoY increase.

Weatherford's financial performance for Q2 2022 was excellent in absolute terms, and also exceeded investors' expectations. WFRD's second-quarter top line was +6% higher than the sell-side's consensus estimate of $1.00 billion. Similarly, while Wall Street had expected the company to stay loss-making for the recent quarter, WFRD was able to generate positive earnings on a GAAP basis in Q2 2022.

Moving ahead, the company management's decisions on deleveraging and Russia should be the key factors influencing Weatherford's share price outlook.

Deleveraging

Weatherford has done a great job in lowering its financial leverage and reducing its credit risks in the past couple of quarters.

WFRD's net debt-to-EBITDA ratio has dropped from as high as 3.3 times as of end-Q1 2022 to just 2.0 times as of June 30, 2022, as highlighted in the company's Q2 2022 earnings presentation slides. In the second quarter of the current year, Weatherford redeemed $50 million worth of its 11% senior unsecured notes, with the remaining principal amount of these notes at around $250 million.

Nevertheless, it is noteworthy that the decrease in Weatherford's financial leverage has been driven more by EBITDA growth rather than a decrease in net debt. Specifically, WFRD's trailing twelve months' EBITDA grew by +75% from $383 million in Q1 2021 to $670 million in Q2 2022. Over this same period, Weatherford's net debt actually increased from $1,270 million to $1,340 million.

At its Q2 2022 investor briefing, WFRD revealed that its priority is to redeem or repay the remaining $250 million principal relating to its 11% senior unsecured notes. But Weatherford also highlighted at the recent quarterly results call that "purchasing other debt" is "not really the focus over the next few years", and it will focus on "reinvesting in the business and growing through the rest of the cycle" instead.

In my view, Weatherford appeared to have struck a good balance between deleveraging and reinvestment as of now. However, I am not as comfortable with WFRD's decision relating to its involvement in the Russian market

Russian Exposure

Weatherford revealed at the company's second-quarter results call that the Russian market has historically accounted for approximately 5-7% of the company's sales. However, WFRD didn't disclose the proportion of its total EBITDA contributed by Russia.

It is noteworthy that a number of Weatherford's oil & gas peers have chosen to exit the Russian market through asset divestments or the like, but WFRD has chosen to continue running its current business operations in Russia. Weatherford has explained at its Q2 2022 results briefing that it isn't exiting the Russian market because the "business (in Russia) is becoming more self-sustaining" and is "operating within the sanctions."

My preference is that Weatherford makes a clean break and exits the Russian market. By retaining its operations in Russia, it could divert precious management attention and time to dealing with the fast-changing developments in the market. Furthermore, it is uncertain if there will be investors who might choose to avoid investing in WFRD due to ESG (Environmental, Social, and Corporate Governance) concerns or other risks relating to its exposure to Russia.

Concluding Thoughts

Weatherford is now a Hold, rather than a Buy. My prior bullish view for WFRD was premised on a positive re-rating of the company's share price and valuations as a result of the potential relisting of its shares on Nasdaq. Since that catalyst has been realized and I don't see any new significant catalysts for Weatherford, I am of the view that WFRD deserves a Hold rating now. More importantly, I am watching Weatherford's future decisions on capital allocation and Russia closely, prior to determining if WFRD is a worthy investment candidate.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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