Weatherford International (NYSE:WFT) surprised quite a few people on Wall Street when it announced that former Halliburton CFO Mark McCollum would be taking the captain's chair at Weatherford. During the company's first-quarter conference call, McCollum got to lay out his plan for the new direction of the company and how he thinks he and his team will be able to accomplish it.
To longtime Weatherford investors, many of the things he said sound similar to prior management statements. What is more important, though, is now the company implements his plan. Here are a selection of quotes from Weatherford's management team that should give you an idea of how Weatherford's new management team is thinking about the path back to profitability.
Integrating joint ventures
Over the past six months, Weatherford's management has been busy making deals. Starting things off, CFO Cristoph Bausch gave an update on where its two biggest deals stand.
During the first quarter, we signed an agreement with Schlumberger to create OneStim, a joint venture focused on completion products and services for the development of unconventional resource plays in the United States and Canada land markets. The joint venture will offer one of the broadest multistage completion portfolios in the market, combined with one of the largest hydraulic fracturing fleets in the industry. Once the transaction closes, Weatherford will own 30% of this joint venture and will receive a onetime $535 million cash payment from Schlumberger. After closing, Schlumberger will manage and consolidate the joint venture for financial reporting purposes...
We have also made some progress related to our alliance with Nabors [Industries] as we jointly identified commercial opportunities in the U.S. market, and we started to work on the software integration allowing Nabors rig control software to communicate and interact with Weatherford's OneSync software platform.
One thing that will be interesting to follow is how McCollum views some of these joint venture deals. Interim CEO Krishna Shivram signed the Nabors deal during his short tenure at the helm, and chances are many of the details of the Schlumberger deal were ironed out before McCollum's start date. This is worth following as McCollum many not be as excited about pairing up with others as previous management was.
Stating the obvious
New CEO Mark McCollum was only a week into his new role when Weatherford reported earnings, so this was the first time that he was able to speak to investors and analysts about his plan for the company. Here's what he laid out as his management priorities for the coming years.
Our largest challenge is to address the debt load on our balance sheet. Weatherford has already taken several significant steps to improve its financial position. As you know, I've spent most of my 36-year career in accounting and finance roles, and I'm keenly aware of the fundamental significance of having both a strong P&L statement and a sound balance sheet. Given the importance of restoring our financial strength, I intend to heighten Weatherford's focus on financial accountability and cost management.
We've got work to do to push toward profitability. We're going to focus on growing our bottom line through the combination of pricing and contracting improvements in a more disciplined cost management process. Simultaneous to and in parallel with our drive for improved financial accountability, we will also continue to drive greater service quality and reliability for our customers in the field.
This sounds great on paper, but it's the same strategy that Weatherford's previous CEO and interim CEO laid out in previous calls. This message may be nothing new to investors, but what will matter is how the new management team executes these strategic goals.
Trimming the fat
Almost anyone can look at Weatherford's balance sheet and point out that it has a high debt load. According to McCollum, though, some other balance sheet issues need to be addressed as well.
[W]hen I look at the balance sheet, there is a lot of cash sitting on the balance sheet in the form of working capital. And while we're coming down, I mean, I think that we've still got a long way to go, particularly in the inventory area. And so I don't -- there's nothing -- in my view, creative to do with that, it's just heavy lifting, right? You've got to get focused on it. You have to have a plan and strategy for pulling it down. And so it's one of the things that Christoph and I are working on right now is getting those plans in place to start bringing that cash off the balance sheet and beginning to use it to pay down the debt.
This is something that isn't discussed as much when it comes to Weatherford. It has some valuable services and products in its portfolio, but they aren't high return businesses because they are bloated with too much inventory and working capital. If new management can get its working capital levels down, then it will free up some cash to be used elsewhere.
For a couple of years now, Weatherford has been trying to sell its land rig business to no avail. Perhaps one of the issues with this plan was that previous management teams were trying to sell the whole business all at once. Based on where those rigs are and the state in which they are, though, McCollum thinks that perhaps a new strategy is in order.
I think that as I look at it, one of the initial goals was to try to sell the business as a complete package, sort of one transaction. I think that as we look ahead, I think that the likelihood that it will be a series of transactions, the rigs are spread across a number different markets, and their performance in each of those markets varies. We have got some really good, solid contract in areas like Kuwait. There are other areas where they are sitting idle, and they need some work, and so we'll probably, as we approach it, probably think about how you break them up in a series of packages and maybe there could be some joint ventures that we entered into to use some of them. But I think it's going to require a different level of creativity to get those redeployed than just sort of a one-transaction type deal.
Perhaps the largest challenge will be selling rigs in the North American market. Sure, production is almost back to pre-crash levels, but producers have figured out how to achieve this with only half the amount of rigs in the field. Only the highest specification rigs get contracts today. If Weatherford isn't ready to spend a lot of money to upgrade these rigs, then chances are it may just need to send them to the scrap yard.
Give us some time
Investors have every right to be a little impatient with the company's performance. After all, this is a company that seems to be in a perpetual state of restructuring and has yet to generate positive earnings results or free cash flow for more than six years. As McCollum pointed out, the company's high levels of debt and its excessive working capital have been a drag on profitability, and fixing these issues is the best chance at returning to profitability. As he pointed out, though, investors are going to need to be patient.
The balance sheet side is going to take some time, right? Wringing working capital out as -- is a process, it typically takes a lot of different actions and you need a little bit of wind at your back from a market standpoint to be able to clear inventories, as an example.
Considering the geographic diversity of Weatherford and the state of the international oil services market, it could take quite some time before we see some significant changes regarding winding down that working capital and paying down debt as promised. Management has to realize, though, that investor patience is a precious commodity right now, and will have to show some tangible results in the coming quarters.