Yahoo Finance Weatherford International plc (NASDAQ:WFRD) Q3 2023 Earnings Call Transcript
Weatherford International plc (NASDAQ:WFRD) Q3 2023 Earnings Call Transcript October 25, 2023
Weatherford International plc beats earnings expectations. Reported EPS is $1.66, expectations were $1.15.
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Weatherford International, Third Quarter 2023 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. As a reminder, this event is being recorded today. I would now like to turn the conference over to Mohammed Topiwala, Director, Investor Relations and M&A. Sir, you may begin.
Mohammed Topiwala: Welcome everyone to the Weatherford International third quarter 2023 conference call. I'm joined today by Girish Saligram, President and CEO, and Arun Mitra, Executive Vice President and CFO. We will start today with our prepared remarks and then open it up for questions. You may download a copy of the presentation slides corresponding to today's call from the website's Investor Relations section. I want to remind everyone that some of today's comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein. Please refer to our latest Securities and Exchange Commission filings for risk factors and cautions regarding forward-looking statements.
Our comments today also include non-GAAP financial measures. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our third quarter earnings press release, which can be found on our website. As a reminder, today's call is being webcast, and a recorded version will be available on our website's Investor Relations section following the conclusion of this call. With that, I'd like to turn the call over to Girish.
Girish Saligram: Thanks, Mohammed, and thank you all for joining the call. We delivered another quarter of solid results, driven by strong operational execution in a mixed market environment. As always, I want to start by thanking the 18,000-plus members of our One Weatherford team for their passion for our customers and business. Everything we have achieved is the result of their spirit, tenacity and commitment. Third quarter revenue increased 3% sequentially and 17% year-on-year, driven by international growth across most regions. While we continue to be an internationally levered business, I want to highlight what our North American team has achieved. Historically, North America has been a margin-challenged region for us, and we have driven a strong focus on improving profitability in the past couple of years through operational improvements, commercial focus, facility consolidation, and exiting certain businesses.
Despite the obvious weakness in North America over the past year, our margin performance in this region has actually increased on a year-over-year revenue decline, and that is a very tangible proof point of the two-cycle resilience of our operating strategy. This quarter yet again witnessed solid margin performance with adjusted EBITDA of $305 million, representing 23.2% margin. We have talked about the firsts on margin and cash several times, and while this is another of those firsts, it is still an intermediate step towards our goal of mid-20’s EBITDA margins. We generated adjusted free cash flow of $137 million in the quarter. While lower than the second quarter, it is higher than what we had guided towards, as we had anticipated some significant collections headwinds in specific geographies, but the rest of the company came together to deliver superior performance.
We also continued to build inventory for a higher product sales fourth quarter. As you saw in our announcement yesterday, we now have a $550 million credit facility in place, and I want to thank our banking partners for their support and engagement. We have consistently said that ours is a journey of improvements in our capital structure, and getting this facility with dramatically improved terms and a revolver of $300 million is a capstone event. Our net leverage is now at 0.9x, and I think that speaks for itself. Over the past three years, we have spent a fair amount of time on these calls on capital allocation, and our actions and results demonstrate our commitment to actioning our priorities. Moving to some of our commercial highlights during the third quarter.
For our drilling and evaluation segment, KCA Deutag awarded us a one-year contract to provide MPD systems and services in Norway, and Transocean has commissioned us to provide and install an MPD system on their ultra-deepwater rig, the Deepwater Aquila. For our well construction and completion segment, Qatar Energy awarded us a five-year contract to provide Liner Hanger systems for its onshore and offshore wells, and Chevron Angola awarded us a two-year contract for conventional TRS for its offshore deepwater operations. For our production and intervention segment, Aramco awarded us a three-year contract for the supply and maintenance of Drilling and Fishing jars, in addition to a two-year contract extension for comprehensive intervention services.
We were awarded a five-year digital solutions contract by Pertamina Hulu Rokan in Indonesia, to provide integrated well monitoring services and our industry-leading foresight edge solution. And finally, Ecopetrol awarded us a two-year contract to provide integrated products and services, including Artificial Lift, Completions, Drilling Tools & Intervention Services. This quarter also witnessed several noteworthy technology milestones for each of our segments, starting with DRE. We deployed the WEL-Core Stabilizer Lost Circulation Material in oil-based drilling fluid, using an engineered approach to reduce downhole losses and enhance drilling efficiencies. We also deployed new high-performance shale and clay inhibitor. WEL-Hibx, designed to improve drilling by mitigating the impact of drilling fluids on formations, while increasing well productivity.
In WCC, we deployed our new V3 Pack Off Stage Tool, which offers a more reliable and robust sealing system aimed at enhancing wellbore integrity. We also deployed the first combination of 16" Two Stage Cementing tool and Annulus Casing Packer in a Geothermal application for the Eavor-Loop in Germany, simplifying the well construction process and improving wellbore integrity. In PRI, we further enhanced our ForeSite suite of offerings by launching ForeSite ReGenX-I, the energy industry's first regenerative variable speed drive for rod-lift systems that harnesses untapped energy through recycling otherwise wasted power and reduces emissions. We deployed our Endura Dual-String Section Mill for a major operator in the Middle East, and our new AlphaV single trip cased hole exit system in the North Sea for Equinor, both aimed at improving operational efficiency by reducing run time.
The examples demonstrate how we continue to innovate and expand the breadth of our portfolio to create meaningful value for our customers every step of the well lifecycle. Now, let's turn to our view on the markets. For North America, it continues to be a challenging period despite strong commodity prices. As continued capital discipline by both public and large private E&Ps, asset sales and consolidation in U.S. shale, especially in the Permian were a headwind to incremental rig and well activity. We believe we are close to a bottom, and as we move into 2024, we expect activity to improve slightly with growing energy demand and strong energy prices, supportive for both E&Ps and service companies across the well lifecycle. Further, improving production outlook provides additional opportunities for us to help customers meet their production targets.
However, as we have discussed, the situation is significantly different for both international and offshore markets, where we see continued strength leading to double-digit activity growth in 2024. In the Middle East, the investment thesis of our major customers remains intact and shows no signs of wavering. While onshore activity remains strong, we see an acceleration in offshore activity across the region, which is forecasted to grow in the mid to high teens next year. Needless to say, the most significant risk is geopolitical, not economic or otherwise. In Latin America, E&P CapEx and activity growth is expected to grow in the high single digits, led by offshore, particularly deepwater. We also see regional pockets of growth in Sub-Sahara Africa, Asia Pacific offshore, and several other areas where we remain well positioned.
As we have said before, our focus will be on revenue quality and pricing versus volume, as we continue to prioritize driving margin expansion and cash generation. The digital ecosystem that runs throughout our portfolio has proven to be a differentiator, as well as a force multiplier for driving operational efficiencies and performance across the well cycle. On November 7, we will host our 19th Annual FWRD Digital Conference with customers, technology partners, and technical experts. We look forward to a robust discussion on the increasing role of digitalization and automation in the sector, and how Weatherford's digital technology supports safe, efficient and optimized operations for our customers. As we look forward into Q4 and to 2024, we are cognizant of the uncertainty stemming from geopolitical and macroeconomic concerns.
A pressure pumping machine at the centre of an oilfield, surrounded by a team of workers in the field. Editorial photo for a financial news article. 8k. --ar 16:9
However, we continue to be constructive on the near to midterm outlook, both in terms of market fundamentals and operator demand, along with our proven ability to execute and deliver margin growth and cash generation. With that, I'd like to hand it over to Arun.
Arun Mitra: Thank you, Girish. Good morning and thank you everyone for joining us on the call. I'll begin with our consolidated results and then move into our segment results, liquidity and cash flows. We had a strong quarter with revenue of $1.31 billion, which grew 3% sequentially and 17% year-over-year. North America revenues improved 2% sequentially, driven mostly by our Canadian business, and international growth was underpinned by strong performance in the Middle East, North Africa, Asia regions. Our operating income was $218 million in the third quarter of 2023 compared to $201 million in the second quarter of 2023, and $121 million in the third quarter of 2022. Net income was $123 million compared to an $82 million second quarter and $28 million third quarter of 2022.
Adjusted EBITDA for the quarter was $305 million, which translated to 23.2% adjusted EBITDA margins, an improvement of 39 basis points sequentially, and 412 basis points year-over-year. Now moving into our segment results, Drilling and Evaluation or DRE revenues of $388 million decreased by $6 million or 2% sequentially, primarily due to lower activity for drilling-related services, partially offset by increased activity in Latin America. DRE segment adjusted EBITDA of $111 million increased by $5 million or 5% sequentially, helped by a change in mix, mainly in managed pressure drilling and wireline. Well Construction and Completion or WCC revenues of $459 million increased by $19 million or 4% sequentially, mainly due to higher activity in Middle East, North Africa, and Asia regions.
WCC segment adjusted EBITDA of $119 million increased by $10 million or 9% sequentially, primarily due to higher cementation products and liner hangar activity. Production and Intervention or PRI revenues of $371 million increased by $5 million or 1% sequentially, mainly due to higher international pressure pumping activity, partially offset by lower intervention service and artificial lift activity in Latin America. PRI segment adjusted EBITDA of $86 million increased by $5 million or 6% sequentially, primarily due to higher fall through for international pressure pumping and artificial lift activity, primarily in North America. Turning to cash flows and liquidity, our adjusted free cash flow was $137 million, a strong performance given the seasonal headwinds and lower collections during the quarter, which impacted our overall net working capital performance in the quarter.
As good as our overall journey has been in improving our net working capital efficiency, I am excited about the opportunities to further improve. We continue to make improvements in internal processes across billings, collections management, and inventory management, which are key performance drivers. We generated operating cash flows of $172 million, down $29 million sequentially. CapEx was $42 million this quarter, compared to $36 million in the second quarter of ‘23. We closed the third quarter of ‘23 with total cash of approximately $946 million, up $24 million sequentially. Improving the company's balance sheet efficiency and de-risking the company on a through cycle basis has been a key priority. We have announced a credit facility with total aggregate commitments amounting to $515 million with a five-year maturity.
Under this facility, we have expanded our borrowing capacity from $45 million through a $300 million revolver, with additional $250 million capacity for performance letters of credit. The SOFR benchmark component of the LC facility has been eliminated, and the covenants tied to the facility now give us more degrees of freedom on capital allocation. As we have done so far, our immediate priority will be to continue addressing the overall debt structure. We have made tremendous progress on that front, repaying $147 million of cross-debt since the end of the second quarter of ‘23, bringing our total year-to-date debt repayments to $368 million. And now with approximately $1.88 billion total debt, it is the lowest gross debt level the company’s had since 2007.
With the 6.5% senior secured notes now below $250 million, we will continue to execute on our capital allocation priorities that remain unchanged. We continue to have opportunities to invest in the company in terms of technology, infrastructure, and CapEx, and that still leaves us with significant cash flow to improve capital structure. The credit facility underscores our significant progress in strengthening our balance sheet as it provides us with greater flexibility to improve our overall capital structure in sync with the scale of the business. I am very pleased and proud of the team for this remarkable achievement in securing this facility. Turning to our outlook for the fourth quarter ‘23, we expect consolidated revenues to be up low single digits sequentially.
Across the segments, DRE revenue is expected to be flat to up by low single digits. WCC is expected to grow by low single digits and PRI is expected to grow by low to mid-single digits. Overall adjusted EBITDA margins are expected to be similar to the third quarter margins. More importantly, they are now expected to be higher than previously anticipated, putting totally a margin expansion of approximately 400 basis points. CapEx is expected to be in the range of $60 million to $65 million, and adjusted free cash flow is expected to be greater than $115 million. To recap, for the full year 2023, this will mark another impressive year of high teens revenue growth, approximately 400 basis points of adjusted EBITDA margin expansion, and a very impressive adjusted free cash flow performance of over $450 million.
I’d like to thank each and every team member of the One Weatherford team that helped us consistently deliver on our commitments. Thank you for your time today. I will now pass the call back to Girish for his closing comments.
Girish Saligram: Thanks, Arun. As strong as our performance has been, the future looks better. We have laid out a roadmap to achieving mid-20s EBITDA margins, and that involves the following elements. Firstly, we are still in an inflationary environment, and while that creates headwinds on material and labor costs, we believe pricing will be a net positive overall and help offset those headwinds. New technology is an enabler to grow share and expand our presence in white space areas. We have launched several new technologies this year and are excited about the pipeline we have in place. Next, our fulfillment initiative is a paradigm shift in how we run operations and bring solutions to customers. Driving structural changes in manufacturing, sourcing, logistics, and our repair and maintenance operations is an enabler for lower costs and faster cycle times, leading to efficiencies and better asset utilization.
Finally, our overall cost infrastructure still represents opportunity for us. While we have taken a lot out in the past few years, the next step is to gain efficiencies through simplification and better technology. These steps will fully unfold over the next couple of years, and our goal will be to continue to demonstrate progress on these quarterly updates. Our ultimate strategic priority remains financial performance, not only on cash and margins, but also on improving the balance sheet. Our results in the third quarter and credit facility announcement are clear outcomes of executing on that priority. The new Weatherford is an organization that is capable of capitalizing on the current cycle while driving long-term value creation. With that operator, let's open it up for questions, please.
Operator: We will now begin the question-and-answer session. [Operator Instructions]. And our first question today will come from Luke Lemoine with Piper Sandler. Please go ahead.
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