2023-03-16 10:01:01 ET
Summary
- In 2022, WFRD’s EBITDA amount rose by 40% YoY and sat at $783 million, while its net debt declined by 9% to $1499 million at the end of 2022.
- The company's net debt-to-EBITDA ratio, which determines the likelihood of defaulting on debt, has been decreasing in recent years and was at 1.91 in 2022.
- Relying on its new contracts, especially in the Middle East and Latin America, WFRD forecasted its revenue to increase in 2023.
- However, due to the recent collapse of two U.S. banks that caused oil prices to drop, the market is not in favor of WFRD as it was before.
- For now, WFRD stock is a hold.
Weatherford International ( WFRD ) stock price dropped in the past few days as oil prices decreased to their lowest levels since December 2021. Due to the collapse of two banks in the United States, the fear of a new financial crisis is now at its highest level and a financial crisis means lower demand for oil and oil-related services. Thus, WFRD’s expectation for higher revenues in 2023 may not come true. However, as a result of a great year in 2022, the company was able to improve its financial health and can cover its obligations. Also, it is worth mentioning that the reopening of China can partially support oil prices. WFRD is a hold.
4Q 2022 results
In 4Q 2022 , for the sake of expanded activity, pricing, and operational efficiencies, the company obtained a 22% adjusted EBITDA margin, which is the highest margin quarter over 12 years. Also, WFRD repaid $133 million of its debt of $2540 million in 4Q 2022; had $2409 million at the end of 2022. Additionally, they were going to have about $31 million of debt repayments in January 2023. Weatherford had a 19% revenue growth of $4331 million in 2022 versus its amount of $3645 million in 2021, driven by higher drilling and evaluation, construction, and production revenues. The company’s 2022 goal was to generate sustainable positive free cash flow, and thus, they could reach the third consecutive year of positive free cash flow in over three decades.
“The overall macro-environment for the sector continues to be supported by strong fundamentals despite continued inflationary and geopolitical headwinds. Our ability to carry our momentum forward is evident in the commercial wins in 2022, including over $6.5 billion of contract wins across our broad customer footprint,” the CEO commented. “In the coming quarters, we will begin to see the impact of our new contracts, technology advancements, and partnerships as we continue to focus on margins, cash flow, and positioning the company for success over the long term. We expect full year 2023 revenue to grow by low double digits to mid-teens year-over-year and for EBITDA margins to expand at least 100 basis points year-over-year,” he continued.
The market outlook
Figure 1 shows that in the past 10 months, WTI crude oil prices dropped from more than $110 per barrel to below $70 per barrel, a level not seen since December 2021. The reason of the drop in oil prices in the past few days is the recent collapse of two U.S. banks, which is a reflection of the recession and a sign of the severe financial challenges that the world faced in the past few quarters. Also, inflation in the United States is still high , and despite Fed’s continuous tight monetary policies to combat inflation, the demand for oil is expected to remain limited. WFRD’s revenues in all geographic areas and all segments increased in the fourth quarter of 2022. However, due to the seasonality, the company expected its 1Q 2023 revenues in Drilling and Evaluation segment and Production and Intervention segment to be lower than in 4Q 2022. However, WFRD forecasted that its Well Construction and Completions revenue in 1Q 2023 to be higher than in 4Q 2022.
As a result of the recent collapse of two U.S. banks, Weatherford’s 1Q 2023 and 2Q 2023 revenues may be lower than they were expected earlier. On the other hand, we cannot ignore the sudden reopening of China which can increase Chinese oil demand and has the potential to support oil prices from decreasing further. Furthermore, despite the expectations for lower consolidated revenues in 1Q 2023 compared to 4Q 2022, the company’s recent contracts can help the company to remain profitable. In the fourth quarter of 2022, Weatherford agreed to provide its integrated drilling services for $500 million to Petroleum Development Oman ((PDO)) for five years. Moreover, in the fourth quarter of 2022, WFRD signed a three-year contract with Aramco to deliver multiple services in a lumpsum turnkey project.
Moreover, in the fourth quarter of 2022, Weatherford had other commercial wins: Kuwait Oil Company ((KOC)) and Weatherford came into a five-year agreement and WFRD is supposed to provide drilling services to KOC. Also, WFRD got a five-year contract from a major operator in the Middle East for fishing services and equipment. In Latin America, Weatherford was awarded a two-year contract from a major operator for its Managed Pressure Drilling ((MPD)) services. Also, Weatherford was awarded another two-year contract from Petrobras for a newly enhanced chemical injection system. Finally, WFRD was awarded three contracts in Latin America to deliver integrated drilling and completion services in onshore and offshore operations.
Weatherford performance outlook
In this section, I analyzed Weatherford International's financial statements to evaluate its performance in previous years. Figure 1 shows that WFRD performed well in 2022. Although their cash balance decreased slightly from $951 million at the end of 2021 to $910 million in 2022, WFRD's EBITDA significantly increased in 2022 and reached the highest amount in recent years. Specifically, the company's EBITDA increased from $556 million in 2021 to $783 million at the end of 2022, while its net debt decreased from $1664 million in 2021 to $1499 million in 2022. Therefore, an overall analysis of the company's financial data suggests that it has the ability to finance and manage potential risks effectively.
Figure 1 – WFRD’s financial data (in millions)
In addition, I conducted an analysis of the company's free cash flow trend over the past year. It was not surprising to find that the company had a promising level of FCF, given that they generated a substantial amount of operating cash in 4Q 2022. A surge in their cash operation from $88 million in 4Q 2021 to $193 million in 4Q 2022, coupled with a 25% increase in capital expenditure from $39 million in 3Q 2021 to $49 million, resulted in a 19% increase in free cash flow to $144 million by the end of 2022. As shown in Figure 2, Weatherford International had the largest share of FCF at 41.4% in 2022 compared to previous quarters. The significant amount of free cash flow is indicative of the company's ability to pay off debt, repurchase stock, and foster business growth.
Figure 2 – WFRD’s free cash flow (in millions)
Moreover, I investigated the leverage condition of Weatherford International. Leverage ratios are insightful to show how the company is financing its assets and business operations. In other words, does it use debt or equity financing for most of its operations? I used some common leverage ratios that have significant comparability to its debt. The ratios are calculated in comparison with previous years to be more helpful.
The net debt-to-assets ratio is a crucial metric used to assess a company's debt capacity. It measures the proportion of assets that are financed with debt, and a higher ratio indicates greater leverage and financial risk. Although Weatherford International's net debt-to-asset ratio increased to 0.35 in 2021 from 0.32 in 2020, it decreased back to 0.32 by the end of 2022. Additionally, the company's net debt-to-EBITDA ratio, which determines the likelihood of defaulting on debt, has been decreasing in recent years and was at 1.91 in 2022. The asset-to-equity ratio also decreased slightly from its peak of 9.63 in 2021 to 8.57 by the end of 2022, indicating that the company is using less debt to finance its assets. These leverage ratios are critical indicators of Weatherford International's solvency and ability to meet its current and future obligations (see Figure 3).
Figure 3 – WFRD’s leverage ratios
Summary
With the current market condition that sparked the fear of a new financial crisis, the energy market outlook is not in favor of Weatherford as much as it was two months ago. However, due to strong financial results in 2022, the company is financially healthy. Also, its recent contracts in the Middle East and Latin America can keep Weatherford profitable.
For further details see:
Weatherford International: New Contracts And Changed Market Condition