It seems that every two steps forward Weatherford International (NYSE: WFT) takes to get back to profitability, it takes at least one step back for one reason or another. This past quarter, the company started seeing better results in some parts of the business, but the same issues that have plagued it for years -- too many overhead costs, separate businesses segments with little overlap -- continue to eat into the bottom line.
After spending a few months on the job, Weatherford's new CEO Mark McCollum started to put together a plan to get Weatherford back on track. That plan is based on what he sees the oil & gas market doing over the next several years, and how the company can fit into that new market paradigm. Here are several quotes from Weatherford's most recent conference call that highlights where he sees the market going and what Weatherford can do with its current assets.
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Oil & gas activity cooling down
Over the past year and a half, the U.S. shale market has rebounded astoundingly. The total active rig count has more than doubled since the bottom in May of 2016. What's even more astounding is that the number of rigs in the field today -- about 950 according to the most recent count -- is half what it was pre-crash in 2014, but that smaller base has somehow managed to increase U.S. production by 600,000 barrels per day.
Since producers have become that much more efficient, it has kept oil prices from rising that much since the bottom of the market. It appears that, according to McCollum, we're likely to see the rate of drilling activity flatten out as a result.
[W]e remain cautiously optimistic despite the recent drop in oil price. Over the last few months, increasing U.S. domestic production and resilient international non-OPEC production have placed pressure on oil prices and the anticipated energy services recovery outside of completions activity in key U.S. unconventional basins has been slow to develop.
We have seen a flattening of the North American rig count which will make it more difficult, we believe, to obtain improved margins, in particular, as certain input costs are likely to increase. On the other hand, with the spring break-up behind us, the Canadian rig count came back earlier than usual and is now above last year's levels.
Let's be clear here, a flattening of the rig count doesn't necessarily mean that production growth will stall. More likely, it means that production will continue to grow at its current rate. There are still several drilled uncompleted wells waiting to be brought on stream, and the pace at which rigs can drill new wells means that we can do a lot more with a lot less in the North American shale patch.
North America still taking market share
Shale drilling in North America has led to a tectonic shift in the oil and gas markets that we have seen play out over the past few years. It has been decades since U.S. production was on the rise, and even more impressive is it's supplying the market with a low-cost source. This has led to North America taking market share from other parts of the world.
Eventually, shale will reach a point where it can't offset the declines from other parts of the world and incremental demand growth. According to McCollum, though, we could see shale take market share for a while.
Over time, steady growth in demand, combined with natural decline rates in basins outside the U.S., should offset U.S. supply surplus and improve the global market outlook, but I'm anticipating that this is a couple of years away.
It'd be great to get some wind at our backs in the form of a market recovery. However, we cannot and are not holding out for a macro-level change to strengthen our results.
What McCollum is suggesting is that the status quo is likely to remain in place. America's production will continue to rise at a fast rate, while global production remains flat. That could have major implications on anyone's oil & gas investments over the next few years.
A new business model for oil services
Perhaps one of the more intriguing developments to come out of this recent oil price crash is how much it has changed the way oil services companies do business. Back when oil was $100 a barrel, it didn't take much effort for anyone to make a decent return. Firms that offered unique product or services didn't have to worry about integrating those services into a single package. Today, though, that thinking doesn't work. As McCollum was highlighting what he saw was one of the issues with Weatherford's current portfolio of services, he tapped into a greater problem facing the industry.
One of the issues that I see is all of our product lines run very independent from each other today. And while that might have been OK for a long period of time, my discussion with customers, they're all -- they say we want solutions. We need solutions.
This idea of offering solutions has hit the oil services business like a tidal wave recently, and it has resulted in some transformative transactions and partnership deals. The two largest, of course, were Schlumberger's (SLB 2.27%) acquisition of Cameron International and General Electric's move to combine its oil & gas unit with Baker Hughes. In both cases, the two are combining equipment manufacturing and services to deliver package deals that include both components. Baker Hughes is even taking it a step further with its connection to General Electric's Industrial Internet of Things data analysis platform, Predix.
Weatherford has dipped its toes into the solutions water, but it has yet to go all in as these other companies have. If the company wants to compete with the larger players, it will have to find a way to integrate the services it already has and to package them with some other unique services.
Getting back on track
McCollum doesn't have an easy task ahead of him. Not only does Weatherford need to adapt to these new realities, but McCollum also has to transform a company that has been burning through cash and posting net losses for years. In the first few months on the job, he has identified the number one priority for the business and how he envisions the company getting there.
Obviously, our top priority is to strengthen our balance sheet. My goal is to cut our net debt in half by the end of 2019. We have a number of initiatives underway designed to help achieve this goal
McCollum continued by outlining the three categories for these initiatives. Just to paraphrase, he wants to implement a greater level of standardization and automation on some of the back end parts of the company such as its supply chain and administrative work; do a complete portfolio review and determine the highest impact places to invest in the business; and to monetize other parts of the business where it may not have the scale to compete.
One example of these monetization efforts is its OneStim joint venture with Schlumberger. Neither of these companies has the size and scale to compete with Halliburton in the North American land drilling market alone, so they are combining Schlumberger's well services business with Weatherford's pressure pumping assets to provide a complete package to customers in hopes of improving margins and asset utilization.
Weatherford has been doing these portfolio reviews for years now in hopes of returning to profitability and cleaning up its financial house. So far, those reviews and actions haven't resulted in much. We can give McCollum the benefit of the doubt here as he is a fresh set of eyes for the company that may see something that his predecessors didn't. However, investors shouldn't hold their breath.
