Weatherford (“WFT”) is the number three player in the oil service market. The question post energy Armageddon is whether this is really only a two player market. After missing numbers for years and taking on debt for acquisitions, WFT filed for Chapter 11 early this year. Their plan was finally confirmed on Friday, December 12th. The stock currently trades in the pink sheets with a plan to relist on the NYSE.
To put it mildly, WFT has struggled for a number of years. The new CEO was brought in as a savior from Halliburton and even he couldn’t right the ship. Just as the Company was about to exit Chapter 11, the Company materially cut Revenue and EBITDA forecasts and cut the bondholder share of new notes way back.
Just before plan confirmation, the bonds were trading at 26 which pits roughly 73% of their recovery in the still leveraged common shares. The plan also forced a bond rights offering, where you had to fund 22 cents of new debt on bonds that trade in the 20s. The Company was well shopped and only minor assets traded. At current levels, you are creating Newco for roughly 5x this year’s plan EBITDA and 4x next year. For some odd reason, some on the sell side are still using old plan numbers. I am using the current plan. The Company’s crown jewel assets is well construction which generates more than half of EBITDA and is 60-70% leveraged to offshore drilling. Should oil spike and sustain to the $80-100 range, you could see EBITDA spike to the high end plan of close to a billion dollars in the out years. I am not counting on that. A blend of 2019’s EBITDA of $580mm and 2020’s $750mm EBITDA is as far as I am willing to go. The other units are also leveraged to higher oil prices, but none more so than this one.
Haliburton by contrast is trading at 8.5x ’19 and 8.1x ’20 EBITDA and pays you 3%. Schlumberger trades at 10.5x and 10.1x ’19 and ’20 and pays a 5% yield. Both industry leaders have had massive moves off the lows where WFT is basically on its lows (the bonds briefly ticked at 24 and were impossible to buy). If you believe as I do that a 20% discount to HAL is warranted, Newco should trade about 6.5x 2020 or $47.37 per share. A more than 100% return from here. Debt holders should be happy to sell it to you for a while until the massive unwanted supply is dried up. I wouldn’t wait that long, but think this is an interesting trade into the $30s for the January effect and energy rebound.
Weatherford Post Reorg. Equity
($ in millions except per share)
As Per Revised Disclosure statement (10/1/19)
Net Debt Analysis
Rights Debt
$1,600
Takeback Debt
$500
Gross Debt
$2,100
Less: Unrestricted Cash
-$535
Net Debt
$1,565
Old Debt Claim
$7,428
New Shares
70
New Share Price
20
EV/EBITDA
Equity Cap
1,400
2019
2020
2021
2022
EV
2,965
5.12
3.95
3.29
3.12
Old Shares
1,004
New Warrants
7
New Warrants Per Old Shares
0.007
New Shares Per Old Share
0.001
Projected Income Statement
2019
2020
2021
2022
Revenue
$5,348
$5,175
$5,452
$5,615
Less:
Cost Inventory and Field Costs
-4,299
-4,013
-4,127
-4,228
R & D
-148
-155
-163
-168
Segment and Corporate G & A
-322
-256
-262
-270
Adjusted EBITDA
$579
$751
$900
$949
Less:
Cash Taxes
-146
-149
-159
CapX
-260
-270
-270
Change in NWC
107
-120
-65
Change in other Assets/Liabilities
59
41
25
Unleveraged FCF
$511
$402
$480
Less:
Cash Interest
-232
-232
-232
Non- Recurring
-80
-
-
Other Cash Flow Items
-48
-62
-67
Total Change in Cash
$151
$108
$181
Beginning Cash
$535
$686
$794
Ending Cash
$686
$794
$975
Net Debt
$1,414
$1,306
$1,125
Revenue Growth
NA
-3.20%
5.40%
3.00%
COGS %
80.40%
77.50%
75.70%
75.30%
R & D %
2.80%
3.00%
3.00%
3.00%
SGA %
6.00%
4.90%
4.80%
4.80%
EBITDA Margin
10.80%
14.50%
16.50%
16.90%
Enterprise Valuation (Based on 2019 net debt and range of EBITDA)
EBITDA
$579
$751
$900
$949
$1,000
EV@
4
x
$2,316
$3,004
$3,600
$3,796
$4,000
5
x
$2,895
$3,755
$4,500
$4,745
$5,000
6
x
$3,474
$4,506
$5,400
$5,694
$6,000
7
x
$4,053
$5,257
$6,300
$6,643
$7,000
Less: Net Debt
-$1,565
-$1,565
-$1,565
-$1,565
-$1,565
Equity Cap @
4
x
$751
$1,439
$2,035
$2,231
$2,435
5
x
$1,330
$2,190
$2,935
$3,180
$3,435
6
x
$1,909
$2,941
$3,835
$4,129
$4,435
7
x
$2,488
$3,692
$4,735
$5,078
$5,435
Value Per Share @
4
x
$10.73
$20.56
$29.07
$31.87
$34.79
70
5
x
$19.00
$31.29
$41.93
$45.43
$49.07
mm shares o/s
6
x
$27.27
$42.01
$54.79
$58.99
$63.36
7
x
$35.54
$52.74
$67.64
$72.54
$77.64
Bond Valuation
Bond Market Price @
$22.00
$24.00
$26.00
$28.00
$30.00
Gross Note Claim
$7,428
$7,428
$7,428
$7,428
$7,428
Market Value of Notes
$1,634
$1,783
$1,931
$2,080
$2,228
Less: Takeback Note
-500
-500
-500
-500
-500
Note Equity Value
$1,134
$1,283
$1,431
$1,580
$1,728
Implied Value of Common @
99%
$1,146
$1,296
$1,446
$1,596
$1,746
Implied Per Share Creation
$16.37
$18.51
$20.65
$22.80
$24.94
EBITDA
$579
$751
$900
$949
$1,000
Note New Equity Value @
4
x
743
1,425
2,015
2,209
2,411
99%
5
x
1,317
2,168
2,906
3,148
3,401
Of New Common
6
x
1,890
2,912
3,797
4,088
4,391
7
x
2,463
3,655
4,688
5,027
5,381
Plus: Takeback Bonds
$500
$500
$500
$500
$500
#ERROR!
4
x
$1,243
$1,925
$2,515
$2,709
$2,911
5
x
$1,817
$2,668
$3,406
$3,648
$3,901
6
x
$2,390
$3,412
$4,297
$4,588
$4,891
7
x
$2,963
$4,155
$5,188
$5,527
$5,881
% Total Note Recovery @
4
x
17%
26%
34%
36%
39%
5
x
24%
36%
46%
49%
53%
6
x
32%
46%
58%
62%
66%
7
x
40%
56%
70%
74%
79%
Equity Valuation
WFT Trading Range
$0.03
$0.03
$0.04
$0.04
$0.05
WFT Creation of New Common
$37.30
$44.47
$51.64
$58.81
$65.98
EBITDA
$579
$751
$900
$949
$1,000
Gross Value for Old Equity @
4
x
$8
$14
$20
$22
$24
1.00%
5
x
$13
$22
$29
$32
$34
of New Common
6
x
$19
$29
$38
$41
$44
7
x
$25
$37
$47
$51
$54
Value Per Share for Old Equity @
4
x
$0.01
$0.01
$0.02
$0.02
$0.02
5
x
$0.01
$0.02
$0.03
$0.03
$0.03
6
x
$0.02
$0.03
$0.04
$0.04
$0.04
7
x
$0.03
$0.04
$0.05
$0.05
$0.05
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Entry catalyst of debtholders throwing in the towel. Exit catalyst would be value energy buyers and other value buyers play multiple arbitrage, or a sale to PE or strategic though as I said it has been shopped many times. It’s a chronic underachiever so don’t wait too long to get out.
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