Weatherford Might Need $1.4 Billion To Avoid Bankruptcy

I recently outlined my major issues with Weatherford International WFT. I believe the company's goodwill and inventory could be overstated by over $2 billion. Asset write-downs of that size could cause Weatherford to breach its debt covenants. This article outlines [i] the potential write-offs and [ii] the capital Weatherford may need to raise to avoid a breach of its debt covenants and/or bankruptcy.

Scenario 1

The following scenarios project [i] potential asset impairments and [ii] the capital required for Weatherford to remain in compliance with its debt-to-capitalization of 60% pursuant to its debt covenants with JP MorganChase JPM.

Q3 2015 Actual Capitalization

At Q3 2015 the company's capitalization (debt and equity) was $14.9 billion. The $7.2 billion equity includes [i] actual equity of $5.8 billion plus [ii] an add-back of $1.4 billion for foreign exchange currency translation adjustments. According to management this add-back is allowed.

$1.8 Billion Goodwill Mark

At Q3 Weatherford had $2.8 billion of goodwill and $400 million in intangible assets primarily related to acquisitions. Many of those acquisitions were made when oil prices were much higher. $1.8 billion of the goodwill is attributable to the company's North American operations. Through YTD September 30, 2015 ("September YTD") North America had revenue of $2.8 billion, EBITDA of $133 million, and a pretax loss of $156 million.

These figures do not include allocations for corporate costs and R&D which were a combined $326 million for September YTD. If corporate allocations were based on percentage of revenue, North America's percentage would be about 38% or $124 million; September YTD EBITDA and pretax loss would be $9 million and $280 million, respectively. That said, the case could be made to write off the entire $1.8 billion goodwill associated with North America.

$542 Million Inventory Mark

Weatherford's $2.8 billion inventory at Q3 2015 appears to be slow moving; inventory was 10% less than the $3.1 billion inventory balance at year-end 2014 and only 14% less than the $3.2 billion balance at year-end 2013. It has declined much less than revenue or cost of sales over those periods.

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Disclosure: I am short WFT

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Koshy Samuel 4 years ago Member's comment

Best Buy: Weatherford, National Oilwell Varco, or Helix...

Shock Exchange 4 years ago Author's comment

Are you asking which one of those stocks the Shock Exchange would buy? He wouldn't buy any stocks at this juncture.