Weatherford International plc (WFT) reported net income before charges of $248 million ($0.32 diluted earnings per share on a non-GAAP basis) on revenues of $3.88 billion for the third quarter of 2014.
Third Quarter 2014 Highlights
- Completed the sale of the Russian and Venezuelan land rig operations;
- Completed the sale of the Pipeline and Specialty Services business;
- Reduced net debt by $717 million using proceeds from the successful divestiture of non-core businesses;
- Improved operating income margins by 145 basis points sequentially to 15.4% led by a 183 basis point gain in the international operations; North America improved by 92 basis points;
- Increased North America revenues by 9% sequentially and 14% year-over-year; and
- Completed the planned cost reductions in our core businesses.
Third Quarter 2014 Results
Revenue for the third quarter of 2014 improved 4% sequentially and was $3.88 billion compared with $3.71 billion in the second quarter of 2014 and $3.82 billion in the third quarter of 2013. Excluding the impact of our divested businesses, third quarter revenues improved 8% sequentially. GAAP Net Income for the third quarter of 2014 was $77 million, or $0.10 per diluted share.
After-tax charges of $171 million for the third quarter included:
- $81 million, net of tax, consisting of severance, restructuring and exit costs related to the workforce reduction and closure of businesses in North Africa, principally Libya, that were negatively impacted by recent disruptions;
- $78 million, net of tax, consisting of severance, restructuring and exit costs related to the workforce reduction and the closure of underperforming operations in specific markets other than North Africa;
- $21 million of other costs, net of tax, primarily consisting of professional fees and other costs associated with the divestiture program;
- $4 million, net of tax, associated with the legacy lump sum contracts in Iraq; and
- Offset by a $13 million gain, net of tax, associated with the sale of non-core businesses.
Net income on a non-GAAP basis for the third quarter of 2014 was $248 million compared to $186 million in the second quarter of 2014 and $177 million in the third quarter of 2013.
Weatherford’s operating income margins continued to improve for the third consecutive quarter, with strong incrementals of 48%, driven mainly by increases in the core business margins. The sequential operating income improvements were driven by:
- Europe/Sub-Sahara Africa/Russia, where a nearly 500 basis point improvement in operating income margins was attributable to continued growth and new contracts in Sub-Sahara Africa and higher revenues and operating income from core businesses in Russia;
- Latin America, driven by higher unconventional activity in Argentina, increases in Brazil on the start-up of new Well Construction contracts and increases in overall activity in Venezuela; and
- North America, where margin improvements were attributable to higher activity levels in Canada with the seasonal recovery following the spring breakup and stronger Formation Evaluation, Completion and Artificial Lift margins in the U.S.
These improvements were partially offset by Middle East/North Africa/Asia Pacific, where disruptions in Northern Iraq and North Africa weighed slightly on operating income margins during the third quarter despite an improvement in overall operating income from higher revenues.
Regional Highlights
• Europe/Sub-Sahara Africa/Russia
Third quarter revenues of $644 million were down $106 million, or 14% sequentially, and down $47 million, or 7%, over the same quarter in the prior year. Third quarter operating income of $140 million (21.8% margin) increased $14 million, or 11%, sequentially and was up 36% when compared to the same quarter in the prior year. The decrease in sequential revenues is due to the sale of the land drilling and workover rig operations in Russia during the early part of the third quarter. Adjusting for the divested businesses, revenue was down 1% sequentially. The improvement in operating income was led by sequential revenue and operating income growth for Well Construction and geographically by the remaining core business operations in Russia.
• Latin America
Third quarter revenues of $611 million were up $63 million, or 11% sequentially, and down $102 million, or 14%, compared to the same quarter in the prior year. Third quarter operating income of $90 million (14.7% margin) was up $22 million, or 32% sequentially, and down $25 million, or 22%, compared to the same quarter in the prior year. The sequential improvements in revenue and operating income were driven by additional activity in Brazil due to the commencement of new Well Construction contracts, higher unconventional activity in Argentina and increases in overall activity in Venezuela, while Mexico had sequential declines in the quarter.
• North America
Third quarter revenues of $1.81 billion were up $155 million, or 9% sequentially, and up $217 million, or 14%, over the same quarter in the prior year. Third quarter operating income of $292 million (16.1% margin) increased 16% sequentially and 36% from the same quarter in the prior year. The sequential revenue and operating income growth was primarily led by Canada, across all product lines. Both the revenue and operating margin improvements in North America were led by our Formation Evaluation, Artificial Lift, Well Construction and Completion product lines.
• Middle East/North Africa/Asia Pacific
Third quarter revenues of $808 million were up $54 million, or 7% sequentially, and down $11 million, or 1%, over the same quarter in the prior year. Third quarter operating income of $76 million (9.4% margin) grew 4% sequentially and increased 10% from the same quarter in the prior year. All core product lines contributed to the sequential growth in revenue and operating income, with Completion and Formation Evaluation posting the strongest results. Geographically, the Gulf Countries and Malaysia led the growth in revenue. These improvements were adversely impacted by the geopolitical disruptions in Northern Iraq and North Africa, principally Libya.
Net Debt
Net debt decreased by $717 million sequentially, primarily from the cash proceeds related to the divestiture of non-core businesses. Capital expenditures of $349 million (net of lost-in-hole) in the third quarter were up sequentially by 1% reflecting investments for new contract awards, primarily in Well Construction and Formation Evaluation, and were up 6% versus the prior year quarter.
Outlook
The Company expects the fourth quarter of 2014 to show higher revenue and operating income in North America, with the U.S. benefiting from continuing growth across all core product lines and also by an improvement in stimulation margins with higher activity levels driven by increased well service intensity as well as a lower operating cost structure. Latin America is expected to show improvement in both revenue and profitability in the fourth quarter given higher core business activity in Argentina and Brazil. The outlook for the Eastern Hemisphere remains positive with increased activity from contract wins in the North Sea, Sub-Sahara Africa and the Middle East, partly offset by the typical seasonal slow down in Russia and some parts of the Asia Pacific region. Cost reductions will continue to help margin improvements, benefiting all regions. Overall margins will improve with a higher level of growth in the core businesses, which should approach 20% by year-end.
The tax rate for the fourth quarter will be in the mid-twenties and will be dependent on the geographic mix of earnings. Weatherford fully expects to generate higher levels of free cash flow in the fourth quarter resulting in positive free cash flow for the year. The Company expects to reduce net debt to be in the range of $7.0 billion to $7.5 billion by year-end.
Bernard J. Duroc-Danner, Chairman, President and Chief Executive Officer commented, “Weatherford’s direction remains steadfast. We are executing on our financial and operating objectives of returns driven growth of our core and the de-risking of the enterprise.”
Weatherford’s core operating income margin was 17.9% for the quarter. This compares with 16.5% for the prior quarter. Sequentially, our core businesses grew revenue by 8%. All core product lines delivered sequential increases in revenue with incremental operating income of 35%. Strong growth is expected in our core businesses during the remainder of the year and throughout 2015. We continue to project our core operating margins to exit near 20% in the fourth quarter.
During the third quarter, we completed our planned headcount reductions and the closures of underperforming operating locations. We have achieved the $500 million annualized pre-tax cost savings goal we set for ourselves early this year. These cost savings will continue to support our results throughout 2015. From our fundamentally strong industrial core, we plan to extract further efficiencies by focusing our future cost reduction objectives in the area of procurement and variable costs. Our determination to run an efficient organization will help underpin our operating income margin improvements throughout 2015.
During the quarter, we completed the sale of our Russian and Venezuelan land rig operations as well as the Pipeline and Specialty Services business. As planned, all proceeds were used to reduce debt. Our continued drive to divest non-core assets and reduce net debt will be unabated throughout 2015.
In 2015, Weatherford will remain committed to the fundamental direction of core, cost and cash. The Company will focus on execution and quality. In addition, Weatherford will remain highly committed to technology. The joint effect of continuing to divest non-core businesses, further optimizing the cost structure, increasing free cash flow, and an unencumbered focus on core businesses, should result in improved profitability and lower debt levels.
Source: WEATHERFORD INTL.
