Weatherford International plc (WFRD) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us for this session with Girish Saligram, the CEO of Weatherford. Girish, thank you for taking the time.

Thank you so much. Appreciate it. I want to thank Goldman Sachs for having me here today, and I'm excited to tell you about Weatherford's journey and the accomplishments of our team. The world today is volatile, and it is the culture and the spirit of our team that gives me great confidence in our future and look forward to sharing that with you. Look, it's a tough time in the world today. Our hearts go out to all of those impacted by the ongoing crisis in Ukraine and sincerely hope that peace is restored soon, spare everyone their further hardship. From a business standpoint, our focus continues to be on improving our operational fundamentals and delivering for all of our global customers while ensuring steadfast adherence to all international laws and sanctions program.

Thanks for those comments. I think you've introduced one of the topics that's top of mind for folks who are attending the conference today. It's exposure to Russia in many forms. Maybe just to start, if you could give us a sense of Weatherford's exposure to the region, what you're doing from an operating standpoint right now and then your outlook, which is a very challenging question, but your first take on that would be very helpful.

Sure, Karl. So Russia represents 5% to 7% of our historical revenue at 2021 FX rates. The impact of Russian operations on our first quarter 2022 guidance will largely be limited to the effects of the depreciation of the ruble. The demand outlook for oilfield services in key markets has been further elevated by recent events, and this really underscores the need for significant global investments to ensure the security of energy supply. While global events evolve at a fast pace, at this point, we continue to expect revenue growth and adjusted EBITDA margin expansion for 2022. And while inflation continues to be a significant headwind, we expect to offset that and exit the year with adjusted EBITDA margins in line with our original aspirations for the year of at least 50 basis points higher than 2021.

Got you. Another question just kind of on the broader environment. There's discussion here about Russian barrels and then hydrocarbons reaching areas outside of the country and concerned about shortages, of course. I'd be interested in your perspective because you touched so many different producers, what's your sense of the industry's both ability and appetite to ramp production should we see shortages emerge?

Yes. So Karl, I think it's a great question. I think it's a bit of a mixed bag. But I think the point I just alluded to earlier, which is the significant underinvestment that we have had in the industry over the past several years, I think, will point to this not being an easy path for the overall industry to suddenly just hike up -- there are some significant challenges in multiple different markets, and it is going to drive the need for greater investment, a greater degree of services, both standard ones and specialized services. But it really isn't something that the industry can just turn a switch on and expect supply to come on immediately.

Got you. And so when you think about that reaction function, are we thinking 6 to 9 months, maybe in some areas, longer term in other basins? What should we be thinking?

Yes. I think, look, again, the time frame varies depending upon the basin, as you pointed out, as well as the type of market environment that exists. But I think it's also going to depend to some extent on a couple of other factors beyond just the natural economics, right? So a big part is going to be government policy and regulations and the overall climate that will allow for more investment in oil and gas that is different right now in different geographies and different administrations. The second aspect is going to be global supply chain headwinds and bottlenecks supply routes as well as raw material availability. So I think those are things that will need to be considered and could have a significant impact depending again on where you are. But I think it is not -- I think at the shorter end of it, it's that 6 to 9 months, where it would be very easy in a few places, but in a lot of other places, I think it's just going to be a bit longer term. And all of this really, I think, again, underscores this point I made earlier on the demand for oilfield services, I think, will continue to be robust.

Girish, coming to the company a little bit here, Weatherford obviously has had a history as a key player in the industry, and now you've progressed with structural changes. There seems to be a degree of discovery value in the shares. Stock is up about 135% or so over the last 12 months. Can you spend a few minutes on talking about the transformation? What changes do you see investors giving you credit for today? And which initiatives do you think would see more enthusiasm over the longer run?

Yes. Ati, great set of questions. I'll say there's a lot to unpack in there. So I'll start with the transformation and what I think people are seeing and why they're giving us credit. So in my mind, it's really 5 key things. I'll start with some of the tangible changes. The first one is the relisting of the company. I think investors have appreciated the greater access, and it also sends a very strong signal back to everyone, both our customers and our investors that we are fully back, we are here to stay. So our listing on the NASDAQ with the ticker symbol of WFRD in June of last year was a significant milestone for us. I think the second thing for me is the refinancing that we did in the fall of last year, 2 very significant tranches of refinancing. We've significantly reduced our interest costs. We've also extended our maturity significantly. So this gives us a very strong runway to really drive the changes that we need to. And I think people understand that. The third is we have shown concrete and tangible progress on the 4 key initiatives we laid out in 2021. So we said, look, there's 4 things we've got to do to fix the business amongst everything else we do. Our North America business had to have margin improvement. We drove a significant focus on variable cost management on organizational simplification and inventory rationalization. I'm not going to belabor you with all of the metrics that we talked about that on our earnings call, but people see that, and we've been steadily reporting on those every single quarter. The fourth thing is the fundamental change in our operating paradigm, how the business is structured, how information flows, how we deliver and actually how we behave as well. Our employees are seeing this. Our customers are seeing this, and I think investors are seeing this as well and rewarding us. And all of it manifests itself in our ability to win business. And in our Q1 earnings call, we highlighted some very impressive wins that I'm confident are just the beginning. The fifth and final point for me is credibility. I think that's the most significant thing. We are gaining credibility from creating a culture of transparency and accountability. We started off by saying our focus is on sustainable profitability and generating free cash flow. So we've achieved 2 consecutive years of free cash flow, which in most companies is a bit of a footnote that you don't really talk about because it's obvious for us. It is the first time in 30 years that's happened in Weatherford, so it's a very significant milestone for us. We've been expanding margins, and we've been very clear about how that's coming about and where we are on this journey. And lastly, our resegmentation that we did from a transparency standpoint. It gives a lot more insight into who we are as a company, what we do. And if you think about this notion of specialty services, I think it really lays that out very clearly. We are a very unique company. We have a broad spectrum of services. So we play across the spectrum. We have the capability to bring multiple different product lines individually as well as on an integrated basis. But we also have some very specialized services that I'm sure we'll touch upon today that very few other players can bring. So those are the 5 big things. Going forward, we've got a lot more to do. We recognize we are not done with this journey, but we've made significant progress. So we continue to focus on addressing our capital structure. But in addition to that, look, we've laid out for 2022, 4 key areas, along with our long-term strategic vectors of technology differentiation, digital transformation and ESG and energy transition. The first one is fulfillment, which is really, again, going back to this operating paradigm of how we deliver to customers, and it involves everything in terms of services as well as material. The second is directed growth. So we know that we are in an upcycle, but we are not going to chase growth that does not contribute meaningfully to our bottom line. So it's going to be very focused. And we are not going to try to be everything for everyone everywhere. The third piece is excellence in execution, which becomes even more critical at a time like this because we've got to make sure, again, the fundamentals of the business are correct, and we win that credibility every day with our customers. And the last piece, which is an enduring theme for us, is around simplification on how we do business and how easy are we to do business with. So coming back, Ati, to what you started with, look, we are happy with the stock performance over the past 12 months, but still believe that the valuation discount is very significant in the business. We trade at approximately half of the multiple of our -- average of our global diversified peers. So given what I've talked about, the credibility we've built, the differentiation that we can bring our customer focus and our ability to win in this marketplace, we think that gap should close over time. So we continue to focus on what we can do, what we can deliver, and we are extremely excited about the potential that we have because we believe we are undervalued.

You spoke about specialty services. You're focused on the services that you previously mentioned managed pressure drilling, for example, or MPD. Can we maybe start by defining what MPD is versus the current industry practice? And how much of a deviation is it? In other words, what is the switching cost for the customer? And what is the trade-off that the customer basically gains out of it? Maybe if you can provide some anecdotes where you've been able to displace an incumbent. And can you touch on how you see the market for MPD evolve over time?

Sure. So Ati, look, preparing for this and over the last 16 to 18 months that I've been in the company, I've spent a lot of time with our product line, our service and our engineering teams. And I've got reams of paper trying to explain to me what it is, and there's a lot of details I can get into. But very simplistically, the way I think about this business, it is about some fundamental technology where we are a clear market leader. But basically, what it is, it's a better way to drill from a safety, a [indiscernible], risk management and an overall economic standpoint, right? So relative to a conventional type of an approach, MPD provides a lot more precise control of the downhole environment. So we've got a lot of different surface equipment, a lot of different sensing technologies. We've got models that we have with our expertise fine-tuned over several years, and that allows us to detect and control influxes, so we can really mitigate hazards before they happen. And that's really the name of the game. So for MPD, what is really interesting about this product line for us in this business is it's really not about us chasing the market or us chasing volume or trying to grow share, but it's an adoption game. So less than 10% of the wells drilled globally today utilize MPD. So for us, the way we think about this, it is about customer education. It is about providing precedents theory. It's going and doing analysis on a customer-by-customer, basin by basin basis and showing them the importance and the impact of what MPD can bring. And so look, if you think about it, if we can get MPD adoption from that less than 10% to 15%, being the market leader, we will naturally gain from it without worrying about, "Hey, can I just go increase my share a point or 2 here or there?" So our focus is really on education of the market. So we are actually very excited that we see our peers as well getting into the MPD business because I think it [ space staple ] that we've been saying for a very long time that MPD is a better way to drill. It is a significant impact to customers. Now look, you asked about switching costs, for example. If you look at it at a purely discrete basis, yes, MPD adds cost into your drilling programs. But when you look at it on the overall total cost in terms of the risk management effect of it and what it saves you in terms of managing hazards, overall, it is a better economic value proposition for customers, and that's something that we've been able to prove in multiple situations. And look, what we go in is we go into customers, we talk about what we have done with other customers, we give them case studies, we give them examples, and then we do trials with them. And only then do they go into a broader adoption. I think it's a great way to do it more and more across the industry. So there are multiple examples where we have displaced others. But again, that is not our focus. Our focus is really on growing the market itself and growing that adoption. In the first quarter, we announced a -- one of our commercial wins, which was with Shell, which gave us a 2-year contract for a multi set of rigs, which was an extension. And this, again, I think, is a great testament to our capability and our leadership in this segment of the market.

So similar question for tubular running services or TRS. This one actually sounds a little bit more straightforward and lower barrier to entry. Can you tell us what the service exactly is? And how do you view your offering on a competitive basis?

Yes. And look, you're right, it sounds similar, but it's actually kind of different because as much as MPD is about adoption, TRS is a product line or a service that is essentially as old as the industry itself, right? So it is not something that is new or novel, but the way we deliver it is. So in its most basic forms, tubular running services, essentially the makeup and handling of all tubulars on a rig location, right? So they're connected together using the hydraulic power tong, and you get to a specific set makeup point. So what this business though is really differentiated by is a number of different things. First one is your service quality and safety. Historically, tubular running services has been one of the services that we provide as an industry that has unfortunately been characterized by a significant number of safety incidents. So the more we can work towards improving safety, improving efficiency and delivering better service quality, it does become a differentiation. The second is the availability of assets to deploy to a customer location so that you can perform the service and have enough of that to ramp up with activity. And the third, which is becoming more and more of an important factor is the environmental footprint that it actually brings in, right? And when you think about this and you think about the service that is segmented into offshore and onshore, and the offshore business is really characterized by being far more premium and where all of these factors I just talked about take on a dramatically higher exaggerated impact, it becomes something that's very critical to demonstrate the efficacy of your service. So we have been known as the most trusted brand in well construction. We are, again, a clear market leader in this space. What we've done is really focus on those elements, right? How do we get better service quality? How do we make sure we are driving safety into our operations and being available for our customers. We've also made some very significant inroads and a lot of developments in the past couple of years, especially around modernization and bringing the convergence of new technology into this space. So we've been able to bring the combination of automation, mechanization, artificial intelligence, coupled with very strong physics-based models to develop a system, for example, called Vero. This is our higher-end tubular running system product offering, and it is something that is gaining a lot of traction in the marketplace. And it's unique because look what this really does is because of the automation and the artificial intelligence that goes into it, we are able to significantly reduce the number of personnel required for this service. So when you think about it, especially again, now you go back to where the risk premium is higher on an offshore location, if you're able to reduce the number of people going on to the rig, safety goes up because you don't have people in the red zone. And at the same time, you're also reducing your environmental footprint. You're not bearing as many people across. You've got a fewer requirements. And what's really getting to be interesting, Ati, is when you think about tubular running services, in conjunction with what we just talked about on managed pressure drilling and start this notion of integrating these services together. And then you've got capability that you can bring on our other product lines, so for example, drilling services, et cetera, it really makes it a very unique value proposition that almost no one else can provide will give you all of that together in an integrated fashion, which is well blended together.

Girish, you mentioned a couple of minutes ago that you're not going to go after all business, even though there's higher demand for your services today. When you think about your capital allocation plans, I just want to start with CapEx first. Where do you see the most need for growth CapEx? Has that changed recently based on what we're seeing in the macro?

Sure. So look, broadly, there's 3 areas where we spend CapEx on. There's infrastructure CapEx here in terms of what you need to run the business, et cetera. There's a product line tool. So this is how we actually deliver our services. So like, for example, in MPD and TRS that we just talked about. And then there's our overall manufacturing and sort of fulfillment aspect of it. So we sort of look at it in terms of overall CapEx means for all, it's about the 3% to 7% range. Now Weatherford's a little bit interesting because you've got to look at it in the broader context versus just a single year, right? We have a business that has shrunk. And so we have put a significant amount of effort into redeployment and reuse of our existing asset base, which has helped us, which is why we had a lower spend on CapEx last year. So for 2022, as we talked about in our fourth quarter call, we expect it to be in the $175 million to $200 million range. We haven't dramatically changed that outlook. We'll continue to evolve and see what happens. But order of magnitude, about 40% of that is really and I'm drilling in evaluation, which is one of the service businesses that is asset heavy but you can get a lot of differentiation there. And the rest of it is really split between our other 2 segments, Well Construction and Completion and Production and Intervention.

Got you. What about the need for or desire for inorganic growth? Are there any opportunities for you to complement the portfolio today? And what does that M&A environment look like right now just given the high volatility we're seeing?

Yes. So look, I think a couple of things. Number one, for us, our predominant and priority focus is on fixing the fundamentals of the business, as I've said a couple of times. So we are focused on organic growth. It is something that we believe very strongly and in the company, and we think we've got a lot of potential. And so we've got to focus on those things, and we're going to stay true to that course. Secondly, look, we are happy with the portfolio that we have. We think it blends together well. I think the resegmentation that we announced recently gives people a better insight, and you can see the balance across it. And we've got market-leading businesses inside each of those segments that we have laid out. Now having said that, there's always something out there. So we continue to be open to the idea, but it has to make sense for us as a business. It has to provide something that truly is a strategic fit that is accretive to the company that we can really grow and build on. Again, it goes back to this notion of commercial growth as well. We're not going to just chase growth for the sake of it. Even though we recognize in today's environment, scale is important, but it has to be the right scale and it has to make sense for us long term and create the same value proposition of sustainable profitability and free cash flow generation.

So coming to a period of positive free cash flow recently, I think most people would agree that the outlook on cash flow is improving across the industry. So you've got some decisions to make now on capital returns at some point in time, continued debt reduction. How should we view that, not just in the near term for 2022, but longer term, what does this balance sheet look like? At what point in time do you feel like deleveraging has hit its targets?

Yes. So look, I think a few things on this piece, right? So first of all, I'll talk about returns, which is really the sort of mentality that we run the business with. It's all about shareholder returns, and it's a very important priority. Having said that, look, for us, it's not a question of this or this, we've been recognized we've got to do this and this. So it's more an and factor, right? Our priority has really been, first of all, attacking our debt. So we've made some significant inroads there with the refinancing that we did of a total of $2.1 billion. We have repaid $200 million of debt that we repaid based on the cash that we generated in the business. And that's, I think, a very significant point to highlight. It wasn't that we got access to new funds or new liquidity. We've generated cash and we've used that to pay down the debt. We -- look, we recognize we've still got this $300 million stub in place, and there's multiple different avenues that we continue to explore and look at on how to address that, but that is clearly a priority for us. It is $300 million at 11%. So there is a significant savings element associated with that. So we are on this track to continue to generate positive free cash flow. So that's an avenue. We are talking to multiple institutions, banks about getting the credit facility that is right for us. And that's very significant. Look, we are looking at all of this from a long-term perspective and saying, how do we make sure we are setting the company up for the long term. And we believe that as we do that and as we continue to drive margin expansion in the company. Going back to what we talked about earlier, which is we believe the business is undervalued, we think there is a significant potential for shareholder returns in terms of equity expansion. So that's really what -- how we are thinking about it, while ensuring that we can grow the business where it makes sense, so we will deploy money into CapEx. We've talked about that. So look, this year, we have laid out a CapEx plan that is significantly higher than last year, but with the intent still of being positive free cash flow for the total year.

You mentioned the credit facility and goals to put one in place. When you think about the right level of liquidity for this company, be it in cash or on a credit facility, what is the right size for you?

So look, we've talked about this in the past, and we have talked about it being in the order of magnitude on a longer-term basis of $200 million to $300 million, plus or minus a little bit. But look, more importantly, what we really think about it is making sure we get the right degree of flexibility with it to do the things that we want to do. One of the things that we've seen over the past several months is there was an implicit -- maybe even explicit assumption that we needed to get that credit facility and before we were able to do anything with our debt. And what Keith and the rest of our team have been able to prove here is we were able to significantly make a change on our overall debt stack without having that facility in place. So for us, it's all about, look, how do we make sure we do the right thing for the company in the long term. And we believe we've got multiple avenues open. But right now, we are around on a net debt-to-EBITDA basis around 2.3x, which is in line with our peers. And we continue to expect that to improve as our operating results improve, especially as we're looking at the cycle that's coming up.

Fantastic. Just last one here on the balance sheet. Energy market, in general, has been volatile over the last couple of years. As you set your target there, should we think about some kind of balance between a debt level, leverage level? What's the thinking there as you kind of get to a final resting point for the balance sheet before you can really turn on the capital returns to shareholders?

Yes. So look, I think we're still a little bit along that journey. So right now, I think we are still focused in the mode of getting that immediate set of priorities down, just improving that leverage, but we don't really have a specific target yet that I would point to and say we've got to get it to that level. But I think all the indicators that we have seen and we have demonstrated over the past 18 months showed just continued progress.

Girish, so we did get a few questions here. So let's touch on that a little bit before we start going into the EBITDA margin conversation. So do you have any specific color that you can provide on the ABL negotiations and how they're going? Any possible details that you can provide in terms of the size?

Yes. So look, what I'll say, Ati, is we continue to work with our banks to see what the right structure is. I think, look, it could be an ABL, could be an RCF, could be something along those lines, some sort of a hybrid, et cetera. The most important thing is we've got to recognize where we have come from as a company, right? We had an ABL and some of the issues that we went into in the summer of 2020, obviously significantly exacerbated by the onset of the pandemic were the issues that we had with that ABL being a predominantly North American one tied to our North America assets, et cetera. So as we think about our business, which, look, about 3/4 of our business comes from outside of the United States, right? So we've got to really think about something that makes sense for us longer term. and that as we will have in this industry, we are as excited as everyone is about this is an upcycle, the thing about cyclical industries is eventually, you have the other side of the cycle. So we want to make sure that whatever we put into place will give us that stability and that efficiency on our capital structure across that cycle. So look, we are having very constructive conversations is what I will say. I think you started with credibility and why are investors rewarding us. I think that credibility is translating to all of our partners in the banking world as well. And we are hoping that they're starting to see this, and we continue to have that dialogue come through. So I'm hopeful and optimistic, and we'll keep everyone updated as we have something specific to report.

Great. So coming to the margins here, your EBITDA margin seem pretty healthy when you compare to the other key service companies in the market. Talk to us about the operating leverage, if you can, that you have in the business today? And where do you see your margins eventually normalizing or if you want to talk about a mid-cycle margin sort of expectation? And what do you need for your margins to reach those objectives? Maybe if you can do this by the new segments since you resegmented?

Sure. So I think, look, a couple of things, right? First of all, it's really nice to hear you say that our margins are healthy compared to others, right? It's a bit of a change in the conversation when it comes to Weatherford and something look we don't take for granted, but we are proud of in terms of the work the entire team has done to get us here. So in the near term, look, we'll see probably a little bit more growth in our production business, but also on the drilling side, just given some of the lag effects right, because it follows the well life cycle. So you've got the drilling piece that kicks in first, got well construction and completions after that and then the production. But just given the difference in the geographies right now, that's kind of where we see a little bit more in production, but then also on the drilling side. In terms of revenue growth per se, right, we've talked about this previously, [ drilling ] into valuation. We think in the low double digits. Well construction and completions at the high single digits and production intervention in the mid to high teens. Now what we don't do is give EBITDA guidance by segment, but the total blend of this at an enterprise level. We expect to see continued margin expansion, as I alluded to earlier, and total year margins in the 16% to 17% range, right? Where we're going to get leverage, though, is a few different areas, right? A big part of this comes from our fulfillment effort that I touched upon earlier. How we -- really drive the changes in our manufacturing, our repair and maintenance network as well as our sourcing and supply chain activities. We think that's going to be a significant contributor. The second will just be, look, activity growth that we have talked about as that comes through the fall-through should contribute as well. And then lastly, you've got pricing, right? It is an environment that multiple people have opined on. And we are starting to see different areas where pricing is starting to kick in and give us a lot more traction. Now offsetting that is inflation to a large extent. That is a very significant issue. But when you blend it all together, as I reiterated earlier, that's where we expect our -- to be in line with our original aspirations and have margin expansion this year of at least 50 bps. So look, longer term, though, Ati, to your question, we believe we've got the potential, we've got the capability and the road map most importantly, and we've demonstrated our ability to execute the involvement of company that is generating EBITDA margins in the high teens. So it's still a ways up from here, but it's going to be a steady improvement, and that's really our focus on how do we do that step by step.

And then when you think about free cash flow conversion, is there a way to think about a target in terms of either conversion from EBITDA or revenue generation over time on a normalized basis? Maybe talk about the variability that working capital may introduce here.

Yes. Look, it's a really important question. And look, we have not given out a specific target on this. And part of it is, I think, the notion of normalized, right? We are going to a company that is going through dramatic change. And we have had 2 consecutive years of positive free cash flow. But it's still an evolving paradigm. Look, we expect to have strong conversion but we have pointed to the fact that relative to 2021, while we will be positive we will have lower free cash flow this year. And that's simply because of the requirements of working capital, as you alluded, and we are doubling our CapEx expenditure. So this will all pay out in the longer term, but we're never going to get to the point of saying, we're going to sacrifice free cash flow or something like that, to do all of this. So it's -- as I said earlier, it's an and situation for us. We'll also look, as you grow in certain geographies, we've got the element of more cash taxes as well. So working capital is probably the most significant piece along with CapEx, as we think about it from a growth aspect. So we've made terrific progress over the past 12 months, right, both on the AR side, but also an inventory rationalization, right? We reduced our DSI significantly in 2021. And all of the focus areas that we have, look, we expect it to be an increase, but really trying to optimize all of these, which is why we are ending up with the projection of positive free cash flow.

Girish, we have only 2 minutes here, but one quick last question. You have a few digital offerings as well. Help us understand what part of the oilfield your digital projects are targeting? Are these offerings geared towards either enhancing your own output? Or do you generate direct revenue from licensing or Software-as-a-Service business models? How much of this business is hardware versus software? Any details that you can provide around that?

Yes. Thanks for asking this, Ati, it's another area that I am tremendously passionate and excited about. I think we've got an incredible digital suite. We are the only company, the only OFS company to have our own SCADAR offering with CygNet. We have a market-leading production optimization platform in ForeSite. Some of the wins we highlighted in the first quarter, the award from Kuwait Oil Company, or KOC for a 3-year contract, to support their digital transformation. So we sell directly to our customers. And not only do we sell the digital piece, but we also provide a set of services around it. And when you think about our business and you think about it horizontally across our segments, we've got digital really connecting a different thread across all of them. So we've got digitally enabled capabilities in managed pressure drilling. I touched upon some of the elements in TRS. As we think about our Drilling Services business, it's a big element with real-time visualization. We've got a platform called Centro and then across the other segments of construction completions and then, of course, on production and intervention. So it's something that we think is very core to our being. It's something that as we think about ourselves as a specialty services business, this is an incredibly important offering to customers and something that really strings that capability together. So today, look, we don't break out the revenues and we don't get into a further segmentation, but we offer across the spectrum, there is hardware elements, there is software as well as services that go along with it and take the capabilities in our products and services and really bring it out in a new light.

That's great, Girish. We're almost at our time here. So I wanted to thank you for taking the time to join us today. Thanks, Karl, for cohosting and thank you, everyone, for joining.

Great. Ati and Karl, thank you so much, and I really appreciate you having me on.