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 January 25, 2016 - 3:35 PM EST
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Fitch Downgrades Weatherford International plc to 'BB'; Outlook Negative

Fitch Ratings has downgraded Weatherford International plc (Weatherford; NYSE: WFT) and its subsidiaries' long-term Issuer Default Rating (IDR) and senior unsecured ratings to 'BB' from 'BBB-'. The Rating Outlook remains Negative.

The downgrade reflects Fitch's lower and longer services recovery profile assumption resulting in the forecasted leverage profile remaining above our through-the-cycle levels for a 'BBB-'/'BB+' credit over the rating horizon. Fitch expects Weatherford's cash flow and leverage profiles to be significantly weaker than previously forecast. Fitch's base case currently forecasts 2015 debt/EBITDA of 5.6x compared to our previous April estimate of 3.2x. The difference is mainly a result of less than expected debt reduction and lower activity and pricing pressure during the second half of 2015. Leverage metrics are currently forecast to increase further to 6.4x in 2016 with incremental oil & gas price-driven leverage metric improvements thereafter.

The Negative Outlook considers the potential that an extended oilfield services downcycle could further heighten liquidity and refinancing risks. The one-year credit facility extension received in the second quarter of 2015 (Q2'15) and cancelled common equity and mandatorily convertible subordinated notes offering in Q3'15 suggests management may have to accept accommodative bank and capital market terms to preserve financial flexibility. The Outlook also reflects the effect that persistently low oil & gas prices could have on U.S. and international exploration and production (E&P) company capital budgets. Lower E&P activity levels will likely challenge the company's ability to consistently generate free cash flow (FCF) to meaningfully pay down debt.

Approximately $7.5 billion of debt, excluding certain short-term borrowings, is affected by today's rating action. A full list of ratings actions follows at the end of this release.

KEY RATING DRIVERS

Weatherford's ratings consider its position as the fourth largest international oil & gas services company, geographic diversification (North America [N.A.] has historically contributed 45%-50% of consolidated revenues), business lines and regional exposure with favorable through-the-cycle revenue characteristics, returns focused strategic initiatives, and projected neutral-to-positive FCF profile leading to moderate further debt reduction. These considerations are offset by the company's mixed asset quality and weaker forecasted through-the-cycle leverage metrics (Fitch-calculated latest 12 month [LTM] debt/EBITDA of 5.5x as of Sept. 30, 2015).

SECOND YEAR OF E&P CAPEX CUTBACKS WEAKENS NEAR-TERM OUTLOOK

Fitch continues to see a longer, slower recovery profile as likely implying that oil & gas market pricing support for a larger scale ramp-up in N.A. onshore activity might be several years into the future. Fitch expects N.A. E&P capital spending to be down 20%-30% and, as a consequence, anticipates Weatherford's N.A. revenue profile will be subject to lower activity and some additional pricing pressure. Fitch believes, however, that N.A. pricing concessions have generally been realized with limited additional headroom for service providers to cut further, since prices for certain products and services are at or below breakeven with many smaller providers in financial duress. This should support market tightening and pricing improvements as oil & gas prices recover over the medium-term.

Fitch expects international markets to remain more resilient but show some moderation with international oil company (IOC) capital spending estimated to be down 10%-15% on average. National oil company (NOC) capital profiles are anticipated to be mixed with the majority of cutbacks to be realized outside of the Middle East and North Africa (MENA). Weatherford expects incremental business in Abu Dhabi and Saudi Arabia and new contract activity in Algeria, Oman, Qatar, and Egypt. Contraction/stagnation in Latin America, Europe, and Asia is anticipated to broadly continue over the near term.

MODESTLY POSITIVE FCF PROFILE & SOME DEBT REDUCTION FORECASTED

Fitch forecasts Weatherford will be approximately $150 million FCF positive for 2015. Debt/EBITDA is estimated to increase to 5.6x in 2015 from 3.0x in 2014. The key driver of the increase in leverage metrics is nearly a 50% drop in EBITDA due to lower activity levels and pricing pressure.

Fitch's rating case forecasts Weatherford will be approximately $325 million FCF positive in 2016. These FCF estimates consider a full year of operating cost savings, maintenance capex levels, additional activity-linked working capital improvements, and further reductions in oilfield services demand. Fitch expects the company to allocate all forecasted surplus FCF towards debt repayment. Thereafter, Fitch's base case forecasts that the leverage profile will exhibit moderate levels of price-driven improvements.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Weatherford include:

--WTI oil price that trends up from $45/barrel in 2016 to a long-term price of $65/barrel;

--Henry Hub gas that trends up from $2.50/mcf in 2016 to a long-term price of $3.25/mcf;

--Consolidated revenue decline of approximately 13% with greater declines in the U.S. relative to international regions on average due to further global E&P capital spending reductions with a moderate recovery thereafter;

--Margins that exhibit a full year of cost improvements in 2016 with some moderate additional cost reductions assumed thereafter;

--Capital expenditures of $400 million in 2016 followed by similarly low levels of capex until operating cash flows exhibit meaningful growth;

--Year-over-year cash flow improvements related to Zubair contractual and severance costs;

--Application of surplus cash to debt repayment;

--Retention of international rig fleet.

RATING SENSITIVITIES

Positive: No positive rating actions are currently contemplated over the near-term given the weak oilfield services outlook and Fitch's forecasted leverage profile that exceeds through-the-cycle levels. However, future developments that may, individually or collectively, lead to a positive rating action include:

For an upgrade to 'BB+':

--Track record of achieving operational and financial targets with material reductions in gross debt outstanding;

--Progress in achieving greater geographical diversification that reduces North America's proportional share of consolidated revenues/margins;

--Mid-cycle debt/EBITDA of approximately 3.5x on a sustained basis.

To resolve the Negative Outlook at 'BB':

--Improved oilfield services outlook supported by market pricing and/or activity level improvements;

--Mid-cycle debt/EBITDA of around 4.0x on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Failure to realize positive FCF and achieve management's debt reduction targets signalling execution issues;

--Continued depressed activity levels that further prolong a recovery in oilfield services demand;

--Bank and/or capital market funding issues that further heighten liquidity and refinancing risks;

--Mid-cycle debt/EBITDA of 4.5x-5.0x on a sustained basis.

Fitch would anticipate downgrading Weatherford to 'BB-' absent evidence of a meaningful improvement in the company's forecasted leverage profile, as well as an alleviation of liquidity and refinancing risks.

FORECASTED FCF AND MATURITIES PROFILE INCREASING LIQUIDITY RISK

Weatherford had cash and equivalents of $519 million, as of Sept. 30, 2015, with most held by foreign subsidiaries. Supplemental liquidity is principally provided by the company's $2.25 billion senior unsecured credit facility due July 2017 and commercial paper program. There are currently no rating triggers with regard to capacity, collateral, or covenants. Approximately $530 million and $509 million in credit facility and commercial paper borrowings, respectively, were outstanding as of Sept. 30, 2015. Facility availability was nearly $1.2 billion, including $16 million in letters of credit. The commercial paper program is sized to the revolving credit facility. Additional short-term borrowings have been provided by the company's uncommitted short-term facilities with $241 million outstanding as of Sept. 30, 2015. The majority of these borrowings ($180 million) mature during the first half of 2016.

Over the next five years, Weatherford has $350 million in 5.5% senior notes due February 2016, $600 million in 6.35% senior notes due June 2017, $500 million in 6% senior notes due in March 2018, $1 billion in 9.625% senior notes due March 2019, and $800 million in 5.125% senior notes due September 2020. The company also pursued open market debt repurchases throughout 2015 and purchased approximately $396 million of long-dated debt as of Sept. 30, 2015. These repurchases were funded with a combination of cash on hand, FCF, and credit facility/CP borrowings.

Management has indicated that they expect to repay the 2016 and 2017 maturities with cash on hand and FCF. However, Fitch's rating case forecasts that the company may need to draw on the credit facility to at least partially refinance the 2016 and 2017 maturities. Forecasted FCF and the scheduled maturities profiles suggest the company will require access to its credit facility, particularly in the current challenged capital market environment. Fitch expects the company to renegotiate the existing credit facility during the first half of 2016 with some accommodation of terms likely. Fitch recognizes, however, that a one year extension consistent with the Q2'15 process and, in a worst case, a delayed renewal/extension process remain possibilities that could further heighten liquidity risk.

COVENANTS AND GUARANTEES

The company's main financial covenant is a maximum debt-to-capitalization ratio of 60% (51.9% as of Sept. 30, 2015) contained in the revolver. The covenant, as defined in the credit agreement, does not have a non-cash asset impairment carve out with the exception of foreign currency translations. This may introduce covenant pressure given the potential impact that depressed oil & gas prices could have on stockholder's equity. Other customary covenants contained in the indentures governing the senior notes restrict the ability to incur additional liens, engage in sale and leaseback transactions, and merge, consolidate, or sell assets, as well as change in control provisions.

Guarantees have been provided by and between the Bermuda and Delaware affiliates for all senior unsecured debt effectively establishing cross-guarantees. Additionally, Weatherford has guaranteed all obligations of its affiliates. All unsecured debt is pari passu.

MANAGEABLE OTHER CONTINGENT LIABILITIES

Weatherford's pension obligations were underfunded by $164 million for the year-ended 2014. Fitch believes that pension funding requirements are manageable relative to funds from operations and pension contributions. The company had over $1.8 billion in other contingent obligations on a multi-year, undiscounted basis as of Dec. 31, 2014. These obligations consisted of non-cancellable operating lease payments ($1.1 billion) and purchase obligations ($708 million). Fitch does not consider the obligations as material credit concerns, which are generally accounted for in operating and capital costs.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings and assigned Recovery Ratings as follows:

Weatherford International plc.

--Long-term IDR to 'BB' from 'BBB-'.

Weatherford International Ltd. (Bermuda)

--Long-term IDR to 'BB' from 'BBB-';

--Senior unsecured notes to 'BB'/RR4 from 'BBB-';

--Senior unsecured bank facility to 'BB'/RR4 from 'BBB-';

--Short-term IDR to 'B' from 'F3';

--Commercial paper program to 'B' from 'F3'.

Weatherford International, LLC (Delaware)

--Long-term IDR to 'BB' from 'BBB-';

--Senior unsecured notes to 'BB'/RR4 from 'BBB-'.

The Rating Outlook remains Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998365

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998365

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Dino Kritikos
Director
+1-312-368-3150
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Committee Chairperson
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (January 25, 2016 - 3:35 PM EST)

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