WEATHERFORD UPDATE
A single-day stock price drop of more than 17% was apparently enough for Weatherford International (ticker: WFT) to cancel its plans for a capital raise. WFT shares have recovered to an extent, but are still trading roughly 10% lower compared to when the raise was first announced.
“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 said in its press release. WFT added it expects to deliver positive fee cash flow “in 2015 and years beyond.”
Weatherford’s Audible
Analyst notes covering the release lauded WFT’s decision to cancel the raise, especially considering the sell-off by the market. Further speculation arose that WFT may be entirely removing itself from contention for assets owned by Halliburton and Baker Hughes’ (tickers: HAL and BHI), which some believed may be a slight negative to the latter parties.
Capital One Securities isn’t ready to write off Weatherford in that regard just yet, saying “While it does appear WFT is seriously considering HAL divestitures and other M&A, the cancellation of yesterday’s debt/equity raise likely doesn’t diminish this possible opportunity, and, if WFT does announce an acquisition, the next capital raise should go over more favorably.”
Simmons & Company was less optimistic, saying the company will not likely pursue deals of “sufficient scale requiring sufficient financing.” Tudor Pickering Holt & Co. questioned management credibility in their respective note, calling the changed plans an “apparent about-face on its prior commentary.”
The company’s debt levels likely played a significant factor in the market reaction – WFT’s debt is nearly equal to its $7.8 billion market cap, and further dilution from the proposed capital raise would have placed more downward pressure on a stock price that has actually fared well compared to its peers According to EnerCom’s Oilservice Weekly, WFT’s share price is down (12%) year to date, compared to a median of (29%) among its eight peers. The company’s expectation for positive free cash flow in the near term is a main driver of the “Buy” rating implemented by Jefferies, who viewed the cancelation as a positive. “If it passes up acquisition opportunities to insure stability, then we think investors are better off,” explained Jefferies in a note on September 22.
ORIGINAL
While some of its largest competitors have announced landmark acquisitions in the past year, Weatherford International (ticker: WFT) has been noticeably quiet on the M&A front. That may change in the near future, following a public offering of both ordinary shares and subordinated notes that are expected to raise a combined $1 billion.
Weatherford announced the capital raise via a press release on September 21, 2015, explaining the proceeds will be used to “pre-fund potential acquisitions and for general corporate purposes.” The subordinated notes will have a maturity of three years and will be issued at 100% the principal amount.
Oilservice Acquisitions are Red Hot
Acquisitions in the oil and gas industry have been commonplace in 2015, as companies are dealing assets, publicly encouraging bidding wars and agreeing to mergers worth several billion dollars. Two of the largest proposed mergers involve the oilservice industry. The much-publicized (and internationally scrutinized) deal is the $34 billion Halliburton/Baker Hughes merger (tickers: HAL and BHI), which is still in the process of receiving approval from various antitrust agencies. The other, announced just last month, is the $14.8 billion merger of Schlumberger (ticker: SLB) and Cameron International (ticker: CAM).
The X-Factor: Cash Availability
Consulting firms like Deloitte expect M&A activity to further accelerate in the closing months of 2015 and into 2016. A note from the firm explains: “Valuation gaps also appear to be closing, such that buyers who have been able to retain cash and/or more sustainable leverage will feel justified in purchasing assets, which fit their portfolio.”
This may be further reinforced depending on results from borrowing base redeterminations. A survey conducted by Haynes and Boone revealed 79% of respondents believe companies will see a decrease in borrowing bases by an average of 39%. In the spring, 68% of survey respondents believed borrowing base decreases were imminent.
“In the spring, it looked like the response was a ‘wait and see’ mentality,” explained Jeff Nichols, Head of Haynes and Boone’s Energy Finance Group, in an interview with Oil & Gas 360®. “With fall approaching, the ‘wait and see’ mentality seems to have passed and there is a recognition that more action is likely to be taken by companies, or needs to be taken, to reduce debt through equity investment, restructuring or even declaring bankruptcy.”
Source: WFT September Presentation
How Weatherford Fits In
The international oilservice company, based in Switzerland, was singled out by analysts as a looming acquisition target following the SLB/CAM announcement in August. A note from Capital One Securities on August 26 said “WFT will be of most interest given the inevitable resurrection of investors looking for something transformative out of [National Oilwell Varco (ticker: NOV)].” The note adds “the marriage of a service provider w/ a manufacturing-geared entity always seemed a bit incongruous in terms of culture, process, and also customer value proposition,” which also holds true to the SLB/CAM announcement.
Today, analysts viewed WFT as a player on the other end of the spectrum. Raymond James Equity Research believes some assets from the pending HAL/BHI merger could also be on the table (the entity plans on divesting as much as $10 billion in assets to satisfy antitrust laws). Sperry Drilling, HAL’s drilling arm, is speculated to be available and Capital One believes a WFT purchase would be a “very positive transaction.” Sperry would provide an extension to WFT’s services, which currently consist mainly of completion and production optimization. Its drilling rigs contributed less than 8% of net revenues in WFT’s Q2’15 results.
Tudor, Pickering & Holt believes HAL may soon announce buyers for some of their available businesses, and the company remains adamant that the merger will be complete within the fiscal year. Analysts from Sterne Agee believe the WFT news is positive for the HAL/BHI front – WFT stock fell more than 15% on the news, and Sterne believes the drop will narrow the price spread between HAL and BHI, which has widened to about 14%.
Enough Room for a Deal?
The value of Sperry Drilling is estimated by analysts to be as high as $3 billion. Weatherford, meanwhile, had $1.9 billion in liquidity at Q2’15 but expects the $1.3 billion in available borrowings on its credit facility to be “temporarily reduced” due to the subordinated notes offered with the capital raise. Its enterprise value of $15.1 billion is the second-largest among nine companies in the Equipment segment of EnerCom’s Oilservice Weekly Benchmarking Report, trailing only NOV (value of $16.4 billion).
Weatherford, from a head count standpoint, has also been among those hardest hit in the commodity downturn. Its current number of employees is approximately 16,000 fewer (more than 25% of its work force) compared to one year ago. The company plans on closing more than 90 operating facilities within the year. In WFT’s Q2’15 conference call, Bernard J. Duroc-Danner, Chairman, President and Chief Executive Officer of Weatherford, said the measures are designed to help the company “operate as a much leaner, more efficient and streamlined organization.”
Not Obsessing on HAL/BHI
Duroc-Danner was also asked about issuing equity to execute a large-scale acquisition but downplayed the HAL/BHI assets in his response. “We’re not obsessive at all about what’s going on with those two companies, but many other people are,” he said. “I think our time is better used focusing on what we have instead of daydreaming about what we could be adding or not. Very difficult for us. Even if we did daydream, very difficult for us.”
Source: WFT September Presentation
