Will Weatherford’s Leverage Improve after Its Share Issue?
The effect of Weatherford’s new equity offering on leverage
In this article, we’ll discuss the implications of Weatherford International’s (WFT) new equity offering on its balance sheet. As of December 31, 2015, Weatherford’s debt-to-equity, or leverage, ratio was 1.7. This is based on 779.5 million ordinary shares issued as of December 31 for total shareholder equity of $4.4 billion. Weatherford’s aggregate short- and long-term debt as of December 31 was $7.5 billion. High leverage reflects increased credit risk. Helmerich & Payne (HP), one of WFT’s peers in the oilfield equipment and services industry, had a low debt-to-equity ratio of 0.11x, as of December 31
Will WFT’s leverage fall?
If all of the $565 million in new proceeds go toward long-term debt repayment, WFT’s long-term debt will fall 9.6% to $5.31 billion. However, Weatherford may not choose to spend all of the proceeds on debt repayment, in which case its debt will be higher. WFT’s debt-to-equity ratio increased nearly 60% in 2015. The new issuance should strengthen WFT’s balance sheet by reducing debt and bolstering equity.
Recent credit rating downgrade of WFT
Weatherford’s weak performance, led by a revenue and income fall, prompted credit rating agencies to downgrade its unsecured debt. On January 25, 2016, Fitch Ratings lowered its credit rating on WFT’s short- and long-term debt. Weatherford makes up 0.4% of the Vanguard Energy ETF (VDE).
Weatherford’s credit facility
On February 1, 2016, Weatherford reduced its borrowing limit under its revolving credit facility to $2 billion from $2.3 billion. WFT has $967 million outstanding under this facility. Read Weatherford’s Steadily Increasing Debt: Does It Matter? for more on the company’s debt.
Weatherford’s outlook on debt
As of December 31, 2015, WFT’s net debt (aggregate short- and long-term debt less cash and marketable securities) was $7.0 billion. In the 4Q15 earnings conference call, the company discussed its plans to reduce net debt to below $6.5 billion by the end of 2016 and below $6 billion by the end of 2017. Its long-term net debt target is $4 billion. To achieve this goal, WFT might sell its rigs business once market conditions improve.
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