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After Canceled Capital Raise, Will Weatherford Plummet To $4?

Weatherford announced a $1B capital raise Monday morning, causing the stock to fall 17%.

The company canceled the offering due to concerns over pricing.

Going forward, the market may focus on poor Q3 earnings expectations, Weatherford's $7.8B debt load, and $4 intrinsic value.

WFT could continue to sell off over the next several trading days.

On Monday morning, Weatherford (NYSE:WFT) announced it would seek to raise $1.0 billion via a mix of ordinary shares and mandatory subordinated notes. The company signaled that it would use the proceeds to pre-fund acquisitions and to reduce borrowings under its revolving credit facility and commercial paper program. Analysts speculated that the capital raise could be used to acquire Halliburton's (NYSE:HAL) divested assets pursuant to its Baker Hughes (NYSE:BHI) merger. While the funding was seen as potentially positive for Halliburton, the market punished Weatherford, sending the stock plunging 17% to $8.41.

Weatherford Cancels Capital Raise

In a 180 degree turn the company announced Monday night that it was canceling the capital raise due to concerns over pricing:

While investor interest was strong for this offering, we are unwilling to sell securities at prices that do not reflect the value we have created at Weatherford. The company continues on its resolute course of focusing on its core businesses and the efficiency of its operations.

By announcing a capital raise, Weatherford signaled to the market that it is in need of liquidity and its balance sheet is sub-optimal. This signal is counter to management's previous assertions. Last month Guggenheim Securities stated that Weatherford was the most oversold energy services company, partly due to management's claims that Weatherford could generate incremental free cash flow of $1.2 billion over the next four quarters. It begs the question, "If cash flow is so robust then why dilute the stock with a capital raise, or why would Weatherford's bonds signal pain ahead?"

Has The Narrative Changed?

The previous narrative was that longs would be rewarded once oil prices rebounded, or how Weatherford could be acquired amid a resurgence in oilfield services M&A. The failed capital raise may have changed the narrative to the following:

Q3 Earnings Could Be Hideous

Big oil has cut capex amid a decline in oil prices; oilfield services companies like Weatherford, Halliburton and Baker Hughes have been hard-hit. One stock analyst suggested this could be the worst oil service downturn ever. Weatherford's Q2 revenue and EBITDA fell Q/Q by 14% and 24%, respectively. Given the industry contraction and cut-throat competition in North America which represents over 30% of the company's revenue, Q3 results could be hideous.

$7.8 Billion Debt Load Appears Unsustainable

With $7.8 billion in debt Weatherford is one of the most-indebted oilfield services companies. Its debt-to-run-rate EBITDA exceeds 5x which is at junk levels. If EBITDA continues to slide - I strongly believe it will - it may prompt the rating agencies to downgrade Weatherford to junk status within the next six months. Such a ratings action would likely send the stock lower.

Weatherford's Intrinsic Value Is $4

Even at $8.41 per share, WFT has an enterprise value greater than 9x my 2015E EBITDA of $1.5 billion. I previously valued the company at 7.0x 2015E EBITDA or $4. Institutions buying into the secondary offering probably would have valued WFT closer to its intrinsic value; in my opinion, that is probably why the company canceled the offering. If the "smart money" believes WFT is worth less than where it is currently trading then the rest of the market could follow along.

Conclusion

The narrative on WFT may have changed. Over the next several trading days I believe the market will focus on Q3 earnings, the company's sub-optimal capital structure and its intrinsic value of $4. Under that scenario WFT may continue to sell off.


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