The yearlong decline in the oil industry hasn't treated companies equally, and Weatherford International (NYSE:WFT) has taken a harder hit than its peers.
The company has been in turnaround mode for what seems like several years now, but it looks like the company is finally putting all that turnaround work behind it. With a clearer picture of the company's structure, we can now focus more on where it plans to go. So here are five quotes from Weatherford International's CEO, Bernard Duroc-Danner, that give a pretty good indication of where the company is focused throughout the industry downturn.
We won't compete in commodity markets when we can preserve capital
When it comes to oil services, some companies have advanced services that can command pricing thanks to something like a technological lead, and then there are just basic commodity services such as pressure pumping. As Duroc-Danner put it, the company is more comfortable idling its commodity services for a better day ahead, rather than operate at a perpetual loss:
[W]e purposely scaled back operations and therefore share the two product lines -- drilling tools, otherwise known as rentals, and pressure pumping. In both cases, there are essentially no barriers to entry, vast oversupply of equipment, and increasingly punitive economics. We won't pursue contracts for that punitive return. We don't have to, and we won't. We'd rather let others do so.
Idling equipment, and finding the right mix of idled equipment and keeping things on the market, was a common theme among oil-services companies this quarter. Schlumberger idled a large portion of its pressure-pumping business because, as its CEO, Pal Kibsgaard, put it, there was no point in running its equipment at a loss just to keep it working. The only time Schlumberger was willing to run equipment at a loss was if it was working with what it deemed a critical customer, and those exceptions were few and far between.
Halliburton (NYSE:HAL), on the other hand, is trying to keep as much of its pressure pumping equipment in the field that can generate breakeven economics. Halliburton's reasoning is that it has a clear market lead in pressure pumping and it doesn't want to give it up so some of the smaller, more financially strained companies that can fill that role.
We will meet our targets
Weatherford hasn't exactly instilled a lot of confidence from investors as it has gone back and forth over some big financial decisions. However, it could make investors forget a lot of those missteps if it can meet its targets for cash flow and debt reduction. The company stated at the beginning of the year that it was going to net $150 million to $250 million in free cash flow in 2015, but last quarter's results made that result look like a tough goal to meet. According to Duroc-Danner , though, it will meet that target:
The company will be free cash flow-positive in Q4. In fact, Q4 should be our highest free-cash-flow quarter for 2015. We'll be free cash flow-positive for the full year. In prior calls, we indicated an estimated $150 million to $250 million range for the year -- for the free cash flow for the full year 2015. We will likely close the year on the upper range -- upper end of that range.
There are two things working in its favor to meet this goal. One is that last quarter's cash flow was eaten up by some seasonally high interest payments to bondholders, which CFO Krishna Shviram said were $100 million more in the second quarter then in the third. The other is up to you, actually. Weatherford is currently excluding the $120 million in litigation charges from cash flow. Without those cash costs, its cash-flow goals are attainable. If you, the investor, think these should be counted, then the stated goal may not be as attainable.
Others may be selling, but we're not buying
As so many companies look to sell assets for a myriad of reasons, analysts have made the broad assumption that larger companies such as Weatherford would gobble up some of those assets at lower prices. This isn't the case, as Duroc-Danner explains:
Now, we need to clarify one point. As a matter of strategic choice, we'll not participate in any bidding for divested assets. We have abundant opportunities internally to generate high returns through efficiencies, high grading talents, and harvesting considerable stock of technology and worldwide setup infrastructure.
This comment was specifically directed at one potential asset -- Halliburton's Sperry drilling segment. To get regulatory approval for the deal with Baker Hughes (NYSE:BHI), both companies needed to sell several assets. Weatherford was originally interested in the business, but as Duroc-Danner explained later, the cost of capital to acquire those assets was too high. With plenty of ways within the company to right the ship, it seems to make sense to not finance a deal right now with expensive capital.
It's a cyclical business; get used to it
Some business cycles can be worse than others, and this one just happens to be one of the bigger ones in recent memory. That doesn't change the fact that this is a cyclical business, though. As Duroc-Danner reminds us, this industry needs a certain amount of investment to keep it going at all times.
We used a qualifier, "decline rates our destiny," as a summary of why this is an intractable fact. Decline rates are, in our view, the most important structural factor to consider, more so than whether demand growth is -- in '16 will be 1 million, 1.2 million, 1.5 million barrels per day.
As long as oil wells decline -- and unless reservoirs can defy the laws of thermodynamics, they will -- there will be a need for new investment and the services of companies such as Weatherford. If Weatherford can position itself to survive the storm in one piece, there will be another wave of investment in the industry that will reward investors.
Yeah, we think the turn is coming in 2017 as well
Just about every oil-services company out there has said that the recovery in oil and gas activity is inevitable, but several overhanging factors such as the low-hanging fruit of refracturing old wells and drawing down inventory will keep it from happening very soon. Weatherford's management agrees with this thesis wholeheartedly. From Duroc-Danner:
The oil industry is at this point unsustainably underfunded and underinvested. Pessimism is everywhere. It is neither reasonable nor realistic. If current oil pricing and related oil selectivity endure, let alone deteriorate further, we do not believe the industry will be able to manage the required oil supplies as early as 2017. This means oil demand will not be met by existing oil capacity. Inventory overhang will help. That isn't a sustainable solution for long. We're quite sure of this.
For some investors, waiting until 2017 may sound like an eternity. However, if the industry does remain that weak for that long, then it might give you a decent investment window to build a strong position in the sector.
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