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Weatherford's CEO Addresses The Haters


On Weatherford's Q3 conference call management attempted to address the haters, including me.

The CEO cleared up its debt-to-capitalization ratio used for its debt covenant. The ratio is closer to 52% than the 56% I previously estimated.

The CFO determined that a ratings downgrade would not negatively impact its relationship with lenders or customers. I highly doubt that.

Management never addressed how a potential goodwill impairment charge could impact its debt covenant. This was telling.

The Q3 earnings call reinforced my short play.

Weatherford CEO Bernard Duroc-Danner. Source:

Weatherford (NYSE:WFT) delivered Q3 earnings earlier this week. Revenue and EBITDA were down Q/Q by 6% and 2%, respectively. Results were on par with those of Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) who both experienced revenue declines of 7%. The bright spot was North America, where revenue was up 2% sequentially; over the past few quarters, North America has been a sore spot for Weatherford and other oil services companies.

Since Q2 I have probably been one of Weatherford's biggest detractors, questioning the company's debt ratios, debt covenants and goodwill. Management appeared to strike out at the company's detractors, including me. Here are some of management's comments and my interpretation:

EVP & CFO On Corporate And R&D Expense

Today I am going to focus most of my comments on the cash flow and the balance sheet including debt and debt covenants ... Below operating margins both are R&D and corporate cost show sequential declines reflecting cost reductions steps that were taken. Going forward both R&D and corporate cost will continue to trend down from third quarter levels.

Shock Exchange Interpretation:

Corporate costs and R&D expense was a combined $101 million in Q3 2015. This was down from $105 million in Q2 and $117 million in the year earlier period. In the past I questioned whether these costs were intractable and if management had the will power to cut them in lockstep with revenue declines. It appears management is on the right track here. If management has the will power to make further cuts to these expenses it could continue to maintain its EBITDA margins.

CFO On Debt Repayment

In addition we opportunistically repurchased $236 million of book value of our long-term debt generating a onetime pretax gain of $35 million while also reducing our future annual interest cost by 15 million. This action demonstrates our confidence in generating enough free cash flow from operations consistently allowing us to not only manage business needs but also manage maturing debt in 2016 and 2017, which we expect to repay with free cash flow ...

As of September 30th, available liquidity...