Weatherford International plc (NASDAQ:WFRD) Q4 2023 Earnings Call Transcript

Weatherford International plc (NASDAQ:WFRD) Q4 2023 Earnings Call Transcript February 7, 2024

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Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Weatherford International Fourth Quarter and Full Year 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the conference over to Mohammed Topiwala, Vice President, Investor Relations and M&A. Sir, you may begin.

Mohammed Topiwala: Welcome everyone to the Weatherford International fourth quarter and full year 2023 conference call. I am 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 our 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 fourth 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 are changing the format of our prepared remarks a bit. I will provide an overview of our operating performance, view on the markets, specifics on the transaction announcements, and our priorities heading into 2024. Arun will then cover the detailed financial results and specifics on guidance before opening for Q&A. 2023 was an outstanding year for Weatherford. Revenue growth of 19%, adjusted EBITDA margins expanding 423 basis points to 23.1%, and adjusted free cash flow of $651 million reflect an accelerated achievement of the short to midterm objectives, we set for ourselves. Our growth has been driven across all segments, with DRE and WCC in the high teens reflecting increased drilling and completions activity.

Geographically, our international leverage coupled with share gains and pricing enabled 26% growth. I want to also highlight our North America performance, where we grew margins, despite revenue declining in a weaker market environment. If there was ever a litmus test of the change in the Weatherford operating culture, our North America performance passes it with flying colors. Cost optimization, technology upsell, and business model changes all helped to drive the profitability increase, coupled with our U.S. Gulf of Mexico business, which grew over 25% for the year. Both quarter performance of $1.36 billion in revenue, EBITDA margin improvement of 34 basis points sequentially, and $315 million in adjusted free cash flow was delivered on the back of the enormous passion and commitment of the entire One Weatherford team.

It has been a privilege for me to witness what this team is capable of, and there is enormous emotion behind my simple thank you to each of our 18,000 plus team members. Turning to the future, as the events of the past couple of weeks have shown, there is a fair degree of volatility, and concern among the investor community. However, we remain confident in continued activity growth for our products and services, across all segments driven, by international customer investment. We are now in the third year of a long-term upcycle. This upcycle shows clear signs of a longer duration than any time in the past couple of decades. The combination of energy demand, growth in emerging economies, reservoir declines, and lack of sustainable investment over the past decade imply that even to maintain current rates of production, there will need to be continued investment and activity for oil and gas projects, at least through the end of the decade.

This outlook is supported by over 100 large projects with investments of over $1 billion each that are on track to reach FID over the next three years. In addition to nearly 700 smaller project FIDs as well. Also, the large majority of these projects, are in countries and regions where Weatherford has invested significantly, and that positions us well, for growth now and in the future. We continue to see the most momentum in our DRE segment with high teens growth in 2024 on top of mid-teens growth in 2023, reflective of our belief in the longevity of the cycle with growth in PRI to follow. In summary, we see a lot of runway for opportunity. Let me start, the geographical view with our North America business, which is actually three distinct pieces.

The first in Canada should grow with the market in high single-digits. Our offshore U.S. Gulf of Mexico will remain stable, and we expect to get more operating efficiencies. And finally, the production-oriented U.S. land business, which has approximately 13% of overall revenue in 2023, is expected to remain flat to slightly down. On the international front, there is broad strength in both the onshore and offshore markets. Latin America was our highest growth region in 2023, and we expect to see that growth moderate in 2024, but still expand in the mid to high single-digit range, driven primarily by Brazil and Mexico, but tempered by Argentina and Colombia. In Europe and sub-Saharan Africa, we expect offshore to be the growth driver, enabling mid-teens growth.

As previously discussed, Russia continues to be uncertain given the operational complexity, as well as FX volatility. We expect Russia to continue to decline in revenue, and while it is difficult to predict, at this point, we are expecting a double-digit rate. Our growth in 2024 will be spearheaded by the Middle East, North Africa, and Asia border geography, with countries like Saudi Arabia, Kuwait, UAE, Oman, Australia, and Malaysia setting the pace. With high-teens growth expectations for the year in the Middle East, the most significant risk to activity growth, continues to be geopolitical, rather than broader macro themes. Clearly, there has been sector-related concern over the past week with the announcement on capacity expansion plans in Saudi Arabia.

From all of our analysis, insight, and discussions thus far, we expect that this will have a negligible impact on our projections. Our position in Saudi Arabia, is mostly onshore, and while offshore represents a tangible opportunity, it is not one that we have factored in significantly into our multi-year outlook. The Kingdom is a critical region for us, but does not meet the 10% of revenue threshold to be reported on separately. We have clear line of sight to activity growth in the next few years that, we are excited about and fully committed, to supporting Aramco with our differentiated technology and services. To summarize, we see strong activity growth for the next several years, and provide a platform for continued revenue growth. We will also look to invest in CapEx and net working capital to support that growth.

Simultaneously, our focus on margin expansion and cash flow conversion, will not be dulled. We laid out our next target of 25% EBITDA margins, and are well on track to achieve that in 2025. In 2024, we will make meaningful progress towards that ambition, and don’t see that goal as the defining limit for the company. We have expanded margins every single quarter since the first quarter of 2022. That’s eight consecutive quarters of margin expansion, and we remain fully committed to the conversion of those margins to cash, as the primary driver of shareholder value creation. As we see market growth continuing, we are also looking at ways to accelerate further. Inorganic growth enables that, and we are excited about the acquisitions we have closed.

While small, relative to the size of the company, these are the first acquisitions for Weatherford in a while, and we are committed, to a totally different integration paradigm than in the past. Our criteria for selection includes strategic fit, followed by margin accretion, positive cash flows, being deleveraging in nature, and fitting within our market valuation envelope. We have acquired two technology companies in the wireline space from Turnbridge Capital, Probe and Impact Selector International, both widely recognized brands, and Ardyne, a leader in well-decommissioning technology, with whom we have had a partnership since the fourth quarter of 2022. We were meticulous in our approach, to diligence and integration planning, as both are critical pillars, to ensure we achieve the full potential of these transactions in the coming years.

Again, these are small, but will be accretive immediately, and projections for them will be included in the overall guidance Ardyne provides. I also want to point out that agreeing to payment for two of these acquisitions, primarily in equity, reflects a strong belief from others in the potential for upward mobility in the stock. Turning to our commercial and technology highlights. As in previous quarters, we received several noteworthy commercial awards across all our segments from various customers, like Qatar Energy, ENI, Exxon, and PTTEP. In addition, we continue to demonstrate the strength of our portfolio with several significant technology highlights with major customers. The details of these are highlighted in our press release for earnings and investor deck.

Our five strategic priorities of organizational vitality, creating the future, customer experience, lean operations, and financial performance remain unchanged for 2024. The initiatives, metrics, and targets within each have evolved to further raise the bar, and we will keep you updated on these on our quarterly calls. Finally, I’d like to touch on some organization updates. I am very pleased that we have been able to attract world-class talent, and I am excited to share that we just welcomed Richard Ward to the company a few weeks ago. Richard joins as our EVP of Global Field Operations, and will have responsibility for all of our Geozone operations. Richard has a deep background in OFS with over 30 years in the industry. We have also announced a couple of other changes to the executive team, with the departures of Chuck Davison and Joe Mongrain.

Both of them have made important contributions to the company and set us up well for the journey ahead, and the transition plans will be seamless. We have always asked to be judged by our results, and I hope you will see the intensity of focus on delivering for our customers and investors. Our operating performance has enabled us to reduce our gross debt to $1.7 billion currently, and our net leverage at this point is 0.7 times. It is our expectation to pay-off the secured notes by mid-year, and following that, to provide a capital allocation framework, including shareholder returns. As we enter 2024, Weatherford is a different company, both different from our own past, but also within the sector. With a firm eye on the future, we are well on our way to building a purpose-driven, leaner, and less capital-intensive organization that is focused on technology differentiation and operational excellence.

My confidence in our ability to perform and execute is stronger than ever. 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 will begin with our consolidated results, and then move into our segment results, liquidity, and cash flows. As Girish outlined, we had a very good fourth quarter, to close out a spectacular year. Full year 2023 revenues of $5.14 billion grew 19%, as all segments experienced growth with net income of $417 million. A 1500 plus percent improvement, an adjusted EBITDA of approximately $1.2 billion, or 23.1% adjusted EBITDA margin of 423 basis point improvement. Revenue for the fourth quarter of 2023 was $1.36 billion, an increase of 4% sequentially, and 13% year-over-year. Operating income was $216 million in the fourth quarter of 2023, compared to $218 million in the third quarter of 2023, and $169 million in the fourth quarter of 2022.

The operating income was sequentially down, primarily due to restructuring charges taken in Q4 for right-sizing our footprint in certain locations. Net income was $140 million as, compared to $123 million in the third quarter of 2023, and $72 million in the fourth quarter of 2022. Adjusted EBITDA of $321 million in the fourth quarter increased 5% sequentially, and 21% year-over-year, with adjusted EBITDA margin of 23.6%, a sequential improvement of 34 basis points, and year-over-year improvement of 157 basis points. These results were primarily driven by increased activity, share improvement, pricing across all segments, coupled with solid operational execution. I would also like to highlight our performance on the integrated contracts in Oman and Saudi Arabia, which have now fully ramped up and are executing very well.

Now moving into our segment results for the fourth quarter of 2023. While drilling and evaluation, or DRE, revenues of $382 million, decreased by $6 million, or 2% sequentially, primarily due to lower activity, for drilling-related services in Latin America, as impacted by weather, partially offset by increased wireline activity, full year revenues increased by 16%. DRE segment adjusted EBITDA of $97 million decreased by $14 million, or 13% sequentially, primarily due to lower activity, and change in mix around drilling-related services. But on a full year basis, DRE adjusted EBITDA margins expanded 308 basis points, reflecting the overall improvement in the operating profile of the segment, with higher activity, cost discipline, and increased traction in the marketplace.

Well construction and completion, or WCC, revenues of $480 million increased by $21 million, or 5% sequentially, primarily due to higher activity and completions and cementation products in the Middle East, North Africa, and Asia regions, partially offset by lower activity in North America. WCC segment adjusted EBITDA of $131 million increased by $12 million, or 10% sequentially, primarily due to higher international activity and a favorable change in mix in tubular running services. Production and intervention, or PRI, revenues of $386 million increased by $15 million, or 4% sequentially, primarily due to higher activity in digital solutions and international artificial lift, partially offset by lower activity, for international pressure pumping, and lower activity in North America for artificial lift.

PRI segment adjusted EBITDA of $88 million increased by $2 million, or 2% sequentially, primarily due to higher fall-throughs for digital solutions, partially offset by lower international activity for pressure pumping. Turning to cash flows and liquidity. For the full year 2023, operating cash flow was $832 million, up $483 million, compared to 2022. An adjusted free cash flow was $651 million, an increase of $352 million. In the fourth quarter, we generated operating cash of $375 million, up $203 million sequentially. An adjusted free cash flow was $315 million, up $178 million sequentially. A strong performance on the back of strong profitability and heightened collections. During the fourth quarter, we were able to collect an additional $140 million of outstanding receivables, from our largest customer in Mexico.

As a result of a financial transaction with a third-party financial institution. We ended 2023 with net working capital at 25.8%, but that number is significantly aided, by the transaction I just referenced. Our journey of improving our net working capital efficiency is far from complete, and we remain optimistic about the opportunities to further improve. In the years to come, our goal is still to achieve a net working capital level of 25% of revenue. And to achieve that, we will continue to drive improvements, efficiencies across billings, collections management, and inventory management, which are key performance drivers. Fourth quarter CapEx was $67 million, or 4.9% of revenue, and full year CapEx of $209 million, or 4.1% of revenue, marked a notable increase in investing for growth.

While CapEx still within our range of 3% to 5%. Every dollar of CapEx incurred is rigorously monitored and focused towards providing incremental returns for the business. Our CapEx thesis of 3% to 5% is still valid in this environment, but important to note that it is over a 12 to 18 month rolling window. We closed the fourth quarter, with total cash of approximately $1.06 billion, up $117 million sequentially. We repaid an additional $151 million of 6.5% senior secured notes in January 2024. This brings the total amount of the 6.5% senior secured notes outstanding to $97 million as of the date of the release. Our net leverage ratio of 0.7x at the end of 2023 marks the lowest ever level in the company in over 15 years. And we will continue to address gross debt, to give us more degrees of freedom.

I would also like to highlight that our return on invested capital, which is net operating profit after taxes, over total invested capital, stood at 27.2%. This top tier performance provides a clear demonstration of our focus on creating value through our operating paradigm. Finally, during the fourth quarter of 2023, credit rating upgrades from S&P to B+ with a positive outlook and Moody’s to B1 with a positive outlook and Fitch ratings initiating a rating of B+ reflects the tangible improvements we have made in our operating performance and balance sheet. Turning toward full year 2024 outlook, we expect consolidated revenues to grow, by double-digits to low teens, compared to 2023. All segments are expected to grow with DRE forecasted to deliver high-teens, WCC to deliver mid-single-digits and PRI to deliver high single-digits growth.

Full year consolidated adjusted EBITDA margins, are expected to make meaningful progress towards a goal of 25%, with a goal of that being the exit rate for the year. We expect – 2024 adjusted free cash flow to be greater than $500 million in spite of higher CapEx, higher cash taxes, and networking capital investment. This represents adjusted free cash flow generation, at the same levels as 2023, adjusted for the one-time acceleration described earlier. CapEx for the full year is expected to be approximately 5% of revenue. For the first quarter 2024, we expect consolidated revenues versus the fourth quarter of 2023, to decline by low single-digits driven by seasonality. Across the segments, DRE revenue, is expected to grow by high single-digits.

WCC is expected to decline by mid-single-digits and PRI is expected, to decline by high single-digits. Adjusted EBITDA margins for the first quarter 2024, are expected to expand 25 to 50 basis points versus the fourth quarter ‘23, and expected to expand by greater than 120 bps over first quarter 2023. CapEx is expected to be in the range of $55 million to $70 million and adjusted free cash flow is expected to be positive. Thanks all for joining the call, and operator let’s open up the call for questions please.

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Q&A Session

Operator: Thank you. [Operator Instructions] And today’s first question comes from Luke Lemoine with Piper Sandler. Please go ahead.

Luke Lemoine: Hi. Good morning.

Girish Saligram: Hi, Luke. Good morning.

Luke Lemoine: Hi. Good morning. Girish, you addressed the elephant in the room with your thoughts on Saudi, during your prepared remarks with how this is unfolding and the mental impact to you and we agree that the future cuts to Aramco CapEx are coming from offshore, Safaniya and Manifa and you hadn’t factored any of this into your multi-year outlook. But could you just refresh us on, which land projects and/or fields you are working on within the kingdom?

Girish Saligram: Yes. So we are working on several different ones without going into hyper specifics. Luke, look, we provide services across the spectrum, as well as provide products. One of the things that is interesting about our business, we also provide products to some of the integrated projects that other service companies run as well. In addition, we have got our specialty services like MPD that we have got a very strong position in Saudi. So, a lot of different ones. Plus look, lastly, we also have our own integrated project that we had talked about in Q4 of 2022. We ramped this up. This is the LSTK project on intervention services. So really across the board, like we mentioned in our prepared remarks, the business is mostly onshore, but we see offshore as a very tangible opportunity and we do work over there today mostly in the form of product sales.

Luke Lemoine: Okay. And maybe just kind of generically within the kingdom, I mean, there’s a decent amount of gas exposure as well for you guys, right?

Girish Saligram: Yes.

Luke Lemoine: Okay. And then you touched on a little bit just kind of, with the integrated projects within Aramco, but just globally, these have been growing fairly substantially. Can you just update us on where these are, what’s to come and how we should think about growth and profitability, within the integrated project business for you guys?

Girish Saligram: Sure, sure. So look, I think a couple of things. We have – got a couple of different models on the integrated projects. First of all, these are not really construction projects. They are really more sort of, what we do in a normal basis, just integrated and fully. Now, some of these we do not provide the rig, and those tend to have a significantly higher profitability, and are significantly accretive. So, we started that in Latin America, in Mexico, for example. And then we have projects where the rigs and other pass-through services are included. So when you have that model, the profitability tends to be lower, but that’s only, because of the pass-through services. The intrinsic profitability of the core services and products that we provide is still very accretive to the company, as a whole.

And most significantly, these projects have a very high degree of cash flow conversion, because of the minimal CapEx. They also provide a baseload of absorption, for the company. So, we think of them, as a very positive thing overall. Now, having said all of that, look, it’s not something that we are going to just go nuts on, and take on a lot of these things. We are going to be very careful, like we have been in terms of the projects that we will take through. So today, we have got a decent number of these projects, but really it’s going to be very measured and we will probably do order of magnitude, maybe one, max two additional ones a year, but nothing more than that.

Luke Lemoine: Okay. Got it. Thanks, Girish. Very nice quarter on free cash flow.

Girish Saligram: Thanks, Luke. Appreciate it.

Operator: And our next question today comes from James West at Evercore ISI. Please go ahead.

James West: Hey, good morning, Girish and Arun.

Girish Saligram: Good morning, James.

Arun Mitra: Good morning, James.

James West: So Girish — Arun — the debt paydown is now well underway. The balance sheet is in great shape. Free cash flow continues to surprise the upside. And I echo Luke’s comments about a great free cash flow quarter in the fourth quarter. So the shift now in your — well, I think there’s probably a shift coming in, kind of the strategic priorities for the business. So one is, is that true? And two, is this shift, which I think would be more offensive in nature? What would you define as the characterizations of that shift? Is it some M&A? Is it market share? Is it continue to block and tackling is it internal? What are the main characteristics?

Girish Saligram: Yes. Hi, James. Look, I think a couple of things. First of all, appreciate the comments. The way I would characterize it is the balance sheet is still not at a great position, its still — but it’s definitely gone from being in pretty dire straits to being in a good position. So, we still have some wood to chop. Our gross debt levels, as everyone knows, are still a tad bit higher than what we would like. So debt will continue, to be a priority with the secured notes being the immediate one, and then continuing to chip away the rest of the debt stack. So that’s still going to be important. Look, as you look at the rest of it, though, you are right, there is a shift, and I think it’s multidimensional, as you have pointed out.

As we mentioned in our prepared remarks, once we have the secured notes taken off. There will be a conversation on overall capital allocation, including shareholder returns. We recognize that that is something that is on everyone’s mind. So, we will come back and address that. Investment into the business is always a priority. We have not slowed that down. Look, over the last couple of years, we have continued to increase investment into technology, especially as well as into CapEx. And as Arun pointed out in his remarks, you see some of that evolution flowing. The inorganic nature of our posture will be, I think a little bit more apparent. We have announced three transactions today, one of which we paid for in cash. It was small. The rest — the other ones predominantly in equity.

So, I think there will be a balance of that. But look, we are going to be very careful about M&A. We are not ever going to be a serial acquirer again. I want to make sure that I am very explicit about that. That is not who we are. But we will do it very selectively where it makes sense. And we have got very robust integration plan. So, I think it will really be a combination of those things, investing into the company, continuing to shore up the balance sheet from a reduction of debt, and then really thinking about what are the inorganic opportunities and with what’s left over, how do we create more shareholder value creation.

Arun Mitra: Yes. And James, just to add to that, it is not only the gross debt, it is also the cost of debt. So our cost of debt, which translates into interest coverage, being lower than our peers, is something that we need to keep working on, but completely aligned with just what Girish outlined.

James West: Okay. Makes sense. Thank you for that and thank you for your comments. And then maybe a quick follow-up from me. Some of the conversations we have had in recent months have talked, a bit more about leaning out the operations. You are competitive on with your pricing structure versus your peers. There’s no discounting to win market share anymore, and so — but your margins are up a lot, and they are chasing a major peer. So curious, though, what opportunities you see on the margin side. I know you highlighted in your prior comments that there’s more room to go here. But could you talk a bit about kind of, what the opportunity set is there for margins?

Girish Saligram: Yes. So, I think there’s a couple of different things, James. So first of all, I will touch upon our big fulfillment initiative. We have made tremendous progress on this, but it’s still one that hasn’t really fully sort of reflected in the results. I am tremendously excited about what we will see, over the course of this year, and then it will really start to deliver in 2025. So, this is a couple of different things. The simplest form of it is facility consolidation, but that’s frankly not the big target here. It’s about strategic sourcing, moving our supply base closer to where our factories are, making sure we have got better cost controls, we have got better sourcing opportunities. So, we think there’s a huge opportunity moving to best cost countries, for example.

We have talked about that in the past. So everything from manufacturing, repair and maintenance, sourcing and logistics, we think that’s got a significant role to play in our margin expansion thesis. Second thing, as you think about the company and our history — as we have gone way up and then come down, the company has a legacy of complexity, just driven by the variety of different acquisitions, all of the different countries we have played, our tax, our legal entity structure, et cetera. So our team has done a fabulous job over the last couple of years of simplifying that, but there’s still some room to go to continue, to further reduce that and simplify the operational flow, reduce manual intervention in a lot of our processes, and essentially get not just margin expansion, but also get velocity, so cycle time improvement, which will help our cash flow conversion.

James West: Got it. Okay. Great, thanks guys.

Girish Saligram: Sure. Thanks, James.

Operator: Thank you. And our next question comes from Ati Modak with Goldman Sachs. Please go ahead.

Ati Modak: Hi. Good morning, guys.

Girish Saligram: Yes. Good morning, Ati.

Ati Modak: You guys spoke about this a little bit, but didn’t really go into detail. So I guess, I will take the option — opportunity to ask. So with all the notes that you have been able to paydown so far, how are you thinking about the right balance between dividend share purchases? And when should we sort of wait to hear from you?