A knee-jerk reaction to this past quarter's decline in oil prices would be to assume that oil-services companies would have a really rough go of it. Weatherford International's (NYSE: WFT) recent earnings report seemed to indicate otherwise. It may not have fully delivered on all the things management said it would do, but it came pretty close and set itself up pretty well for the rest of the year.
The numbers
| Metric | Q3 2015 Estimate | Q3 2015 Actual | Q2 2015 Actual | Sequential Change |
|---|---|---|---|---|
| Revenue | $2.32 billion | $2.23 billion | $2.39 billion | (6.6%) |
| EBITDA | $334 million | $317 million | $323 million | (1.8%) |
| Eearnings per share | ($0.10) | ($0.22) | ($0.63) | 280% |
Source: Company earnings release; consensus estimates from surveys complied by S&P Capital IQ.
The good
One of Weatherford's goals it has been working on since before the market downturn was to increase profitability. One way of achieving that was to take a proverbial chain saw to its cost structure. According to management, it has reduced its workforce by 11,000 employees in 2015 that will translate to a reduction in annual operational costs of $803 million.
Well, this quarter the company was able to show off the fruits of its cost-cutting labors, as it was able to do something that its largest competitors -- Schlumberger (SLB +0.36%) and Halliburton (HAL +1.81%) -- couldn't do: improve pre-tax operating margins.
| Company | Operating Margins Q3 2015 | Operating Margins Q2 2015 | Change (in Basis Points) |
|---|---|---|---|
|
Weatherford International | 5.4% | 4.9% | 47 |
| Schlumberger | 18% | 19% | -101 |
| Halliburton | 0.7% | 4.2% | -352 |
Source: Company quarterly earnings reports.
What's even more surprising about these numbers is that Weatherford was able to reduce its operating loss in its North American segment, whereas both Schlumberger and Halliburton saw their biggest declines in the same region. Weatherford is still a long way off from Schlumberger's 18% margins, but the company is trending in the right direction.
The "meh"
For well over a year now, Weatherford has restructured its business several times to become a more proftiable company and to right-size itself for the recent downturn in the oil and gas market. While those moves have helped lower its costs, it has been forced to take several restructuring charges, asset impairments, and goodwill writedowns in the process. On the income statement they're called "one-time charges." When they happen for six straight quarters and cost more than $1.3 billion, though, it's hard to call them just one-time affairs.
This quarter, though, the company was finally able to drastically slow down the rate of these charges. This quarter the company only logged $67 million in charges. It's still paying out these so-called one-time charges, but it's a considerable turnaround from the $337 million in charges it took last quarter. Also, most of those charges were related to severance for its workforce reduction, so those charges should decline even more in the coming quarters.
The bad
One point that was a little discouraging was the that the company is struggling to meet its stated free cash flow goals for the year. According to management, projected free cash flow for 2015 was supposed to be $150 million to $250 million. After seeing this quarter's cash flow, though, it's looking like that won't happen.
So far in the nine months of 2015, the company has outsepnt its cash flow by $159 million ($39 million if you don't count litigation charges as Weatherford would prefer you do). Considering that in its most productive quarter this year its cash flow exceeded spending by $100 million, the chances of meeting that target look pretty slim.
The outlook
According to the statement from CEO Bernard J. Duroc-Danner, it looks as though the company thinks it can still meet its cash flow target thanks to some large free cash flows in the fourth quarter. That remains to be seen, but according to Duroc-Danner, it will be able to get there in large part from even further cuts to its cost basis:
We expect positive free cash flow in the fourth quarter and for the full year driven by further reductions in working capital balances, and continued discipline on capital expenditure spending. The full year forecast for capital expenditures has now been further revised downwards by another $100 million to $650 million, which is 55% lower than 2014 levels.
We successfully completed all of the previously announced headcount reduction of 11,000 during the third quarter. This target has been revised upward to 14,000 with an increased focus on support positions to be completed by year end. In addition to our headcount reductions, we have closed five of our planned seven manufacturing and service facilities. We will close one more by the end of the year, and the remaining closure will occur in 2016. We have also closed over 60 operating facilities across North America through the first half of 2015 and over 70 through Sept. 30, 2015. We plan to close approximately 90 by the end of the year.
The 10-second takeaway
There isn't much Weatherford can do right now when it comes to revenue, as it is more or less a victim of the broader market, but if it can continue to cut costs as it plans, then it should be able to build on some of the progress it showed this quarter. Whether that merits another look at the company as a potential investment: Let's just say the jury is still out on that one.
