Weatherford International (NYSE:WFT) hasn't exactly been known as the best oil services investment over the past several years. Profits have eluded the income statement, cash flows have been a trickle at best, and it has been burdened with a big debt load.
But the company just put up an "under new management" sign, as this conference call was the first time that interim CEO Kirshna Shivram got to address analysts and investors. Clearly, he had a lot to say. Here are several pertinent quotes from the most recent conference call that investors should know about the new look of Weatherford International.
Complete reboot of the executive team
Back in November, former CEO Bernard Duroc-Danner stepped down and was replaced by CFO Krishna Shivram. Since then, Shivram has quickly gone to work putting together his own executive team:
We appointed a new CFO, a new President of regions and a new head of quality and HSE reporting directly to me.
It should be noted that Shivram has not officially been appointed to the CEO position. Based on what he was saying on this conference call, though, it would appear that the appointment is more of a formality than anything else.
Showing signs of life
After several years of declines that have taken a huge toll on Weatherford's balance sheet and stock price, Shivram did point out that there are some signals that a recovery across the industry are underway.
Overall, I'm pleased with our fourth quarter results. Revenue grew by 4% sequentially, with operating income incrementals of 68%, easily exceeding our target of 50%. North America revenue grew 8% and would have grown 17% had we continued our pressure pumping work for the full quarter. The incrementals in North America were 104% as we took costs out right through the quarter.
Incrementals he is referring to are improvements in gross profits. The combination of lower costs and slight upticks in revenue are leading to some pretty impressive gains on gross operating profit.
This conference call was the first time that Shivram has been able to directly address shareholders. So this is where he was able to lay out his plan for the company. On paper, it's a very simple one:
I would like now to set out Weatherford's strategic goals and directions. We have developed the strategy with 4 pillars. Firstly, we will reduce our net debt to below $3 billion over the next 4 years. Secondly, we will position ourselves as specialists in well construction and production optimization. Thirdly, we will work to create new sales channels and pursue external integration opportunities with partners. And lastly, we will get back to basics in the way we work.
Of course, building this kind of plan and implementing it are two completely different things. The first one is key as Weatherford's debt load has been a challenge for some time. Shivram thinks that it can be done as some of its convertible debt gets converted to equity and by selling its pressure pumping and land rig businesses.
When you adjust for all of these items I've set out above, our pro forma net debt reduces from $6.5 billion at the end of 2016 down to a range of $2.7 billion to $3.2 billion at the end of 2021. We believe this debt reduction journey, as I have explained it, is eminently achievable, and it is the single highest priority of the company to reduce net debt below $3 billion by 2021.
Finally seeing some free cash flow?
Something that has escaped Weatherford for years has been free cash flow, either because its operations weren't generating adequate cash or its investments were simply too much. According to Shivram, free cash flow can be achieved if the company focuses on keeping capital spending at a low rate and focus on utilizing a greater amount of its existing assets.
We cannot conclude the discussion on debt reduction without discussing free cash flow. Free cash flow from operations will continue improving with the recovery in the business cycle. CapEx in 2017 and 2018 will remain tightly controlled as we improve asset utilization and mop up the enormous amount of excess equipment and manufacturing capacity we have on hand. In the medium to longer term, we expect our overall CapEx to run in the 5% to 6% of revenue range annually after 2018.
We continue to be long on inventory, and we expect to continue liquidating inventory into 2017 as activity levels pick up.
This does sound promising, but do keep in mind that the company has been saying it would free cash flow positive for some time now. This is probably a goal that investors should treat with an "I'll beleive it when I see it" attitude.
What we will do best
Being a large oil services company has become harder as companies in the industry have consolidated and have been providing a broader range of services. Shivram wants to go in the other direction, though:
Instead of trying to be a one-stop shop for everything from greenfield exploration to well abandonment, we need to recognize and focus on the sweet spots of Weatherford.
Weatherford plays largely in the production arena rather than exploration and is more well-centric rather than reservoir-centric. Our focus is to become the best well construction and production optimization company.
This is an interesting tactic to consider, especially when two of its largest competitors -- Schlumberger and Baker Hughes -- have both made corporate moves lately that would make them more of that one-stop shop that provides both the services and equipment throughout the lifecycle of the well. It will be interesting to see how that dynamic plays out over the next several years.
Working well with others
In conjunction with that more narrow focus on the things it does well, Shivram's plan for Weatherford also involves working with other companies that have complementary offerings to provide better options to customers. Here's Shivram's thinking behind the idea:
We believe the entire industry should gear itself for a medium-for-longer oil price environment. This means that for the foreseeable future, we should expect oil prices to oscillate within the $50 to $70 per barrel band as the U.S. becomes a swing producer and provides both bookends to this pricing range.
For the industry to survive, everyone in the value chain has to make an acceptable economic return, starting with the operator, the drilling contractors, the service companies and the equipment manufacturers. The only way to do this is to lower the cost of producing a barrel of oil to the point where everyone makes a decent return within this oil price band. Today, that is certainly not the case. The only way forward is a step change in automation, mechanization and digitization.
In all my meetings with customers, this theme is often repeated. While integration is the way forward, the old monolithic style of heavy R&D spend developing me-too technologies and competing on price is not entirely valid anymore. While technology development remains key for the future of the industry, what I call external integration is emerging as a theme with regularity in our customer conversations.
In fact, the same day that Weatherford released earnings, it also announced a memorandum of understanding with land rig owner Nabors Industries (NYSE:NBR) where Weatherford will incorporate several of its automated drilling software and technologies onto Nabors rigs to enhance the value those rigs have to customers, while providing a larger sales channel for drilling technologies from Weatherford.
But the right companies
Of course, these kinds of corporate collaborations have to make sense for the company's bottom line. So, as Shivram puts it, the company will be selective with the companies with which it will partner:
No, we are not looking at local service companies internationally, not at all. I think what we're looking for is meaningful partners that we can work on a large scale. I don't want to waste my time on small countries with small channels here and there. The Nabors, for example, alliance is a very large market in the U.S. land, and that materially moves the needle for both Nabors and Weatherford. So those are the kind of channels that I'm interested in pursuing. Secondly, if there are some discussions on technological, let's say, integration with other companies, which make eminent sense, which could open new markets, so those we will pursue as well. But we will not pursue local companies to deliver our either combined technologies or individual technologies to different customers internationally.
What a Fool believes
Shivram seems to be saying the right things here, but the devil is in the details. If the company can actually make good on its plan, then Weatherford may finally be able to pull itself out of this multiyear funk. Until we see some tangible results, though, investors should maintain that "prove it to me" mind-set.