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TEXT-S&P revises Weatherford International outlook to negative
August 21, 2012 / 9:02 PM / 5 years ago

TEXT-S&P revises Weatherford International outlook to negative

Overview
     -- Switzerland-headquartered oil and natural gas services company 
Weatherford's credit protection measures are weak relative to our expectations 
for the current rating.
     -- The company has increased reliance on debt to finance growth over the 
past several quarters which has slowed improvement in the company's key credit 
ratios.
     -- We are revising our rating outlook on the company to negative from 
stable, reflecting a greater likelihood that the ratings could be lowered if 
the company is not able to restore credit metrics to appropriate levels for 
the rating over the intermediate term.

Rating Action
On Aug. 21, 2012, Standard & Poor's Ratings Services revised its outlook on 
Switzerland-headquartered Weatherford International Ltd. to negative from 
stable. At the same time, we affirmed the 'BBB' long-term corporate credit 
rating and the A-2 short-term rating.

Rationale
The rating action reflects our view that anticipated improvement in the 
company's credit protection measures will likely be delayed relative to our 
prior expectations. Weatherford's reliance on debt to finance growth over the 
past several quarters has slowed the pace of improvement in the company's 
credit metrics. 

The ratings on Weatherford International Ltd. reflect our assessment of the 
company's "satisfactory" business risk and "significant" financial risk. The 
ratings incorporate the company's position as the fourth-largest oilfield 
services provider, breadth of its product and service line offerings, and 
favorable geographic diversity. The ratings also reflect the company's high 
level of continued business investment (capital expenditures, working capital, 
and acquisitions) in excess of funds from operations that have resulted in 
debt increasing by an average of $300 million per quarter since mid-2011. This 
has significantly slowed the pace of the company's credit ratio improvement.

Our assessment of Weatherford's satisfactory business profile stems from its 
diversification in major oilfield product and service categories that include: 
artificial lift, well construction, drilling services, drilling tools, 
completion systems, wireline and evaluation services, reentry and fishing 
services, stimulation and chemicals, integrated drilling and pipeline and 
specialty services. Although the company maintains a top-three market position 
within several of its segments, we view its competitive position as somewhat 
weaker than that of peers Schlumberger, Baker Hughes, and Halliburton, which 
we generally view as having stronger holistic product and service offerings 
and which have generally demonstrated more muted cyclical margin volatility.

Weatherford's consolidated operating performance has improved meaningfully 
over the past year. In the second quarter, revenues were up 24% and EBITDA 
margins were roughly flat compared with the same quarter in 2011. Revenue 
improvement has benefited from increased activity and demand across all four 
of its geographic segments; however, North America and (to a lesser extent) 
Latin America accounted for the vast majority of the improvement in 
consolidated results. From a product perspective, the company saw notably 
stronger year-over-year demand in its well construction, artificial lift, 
completions, and drilling services product lines which benefitted from strong 
liquids pricing and associated higher levels of E&P drilling activity.

In our view, improving trends in the company's financial performance are 
likely to continue through 2013. Higher levels of anticipated E&P spending, 
continued recovery in international operations, and a greater realization of 
earnings from recent and continuing capital investments should spur revenue 
growth of about 20% in 2012 and 10% in 2013. A greater proportion of growth 
will likely come from international operations, given the earlier stage of 
recovery in activity levels and the abatement of various project delays that 
hurt 2011 performance. We anticipate that consolidated EBITDA margins will 
improve to about 22% in 2013 as the company experiences a stronger backlog of 
international projects, the expiration of certain lower-margin contracts, and 
political and weather-related disruptions subside. The company has less 
exposure to the softening North American pressure-pumping market than its 
peers, accounting for about 9% of consolidated segment operating profit in 
North America.

Weatherford has reported a material weakness in its internal controls over 
financial reporting related to income tax reporting and indicated that it has 
identified adjustments that are material to prior years. As a result, the 
company is in the process of remediating associated deficiencies and restating 
its historical financial reports. The company has obtained waivers for the 
filing of interim financial statements through March of 2013.
 
We view the company's financial profile as significant. Funds from operations 
(FFO) to debt has improved from the high-teens percentage area to the mid-20% 
area over the past year. Credit metric improvement during this timeframe has 
largely been framed by growth in earnings slightly outpacing growth in the 
company's debt balances. Current credit protection measures are weak relative 
to the 35% to 40% FFO to debt level that is considered appropriate for the 
rating category.

We believe that Weatherford's credit protection measures are likely to 
approach levels more consistent with the rating category in 2013. Our forecast 
assumes that EBITDA will expand to $3.2 billion and $3.8 billion in 2012 and 
2013, respectively, given our expectations for about 20% revenue growth in 
2012 followed by 10% growth in 2013 and gradual expansion of margins to 
slightly more than 22% in 2013. Corresponding levels of funds from operations 
are $2.3 billion and $2.8 billion. We estimate that debt balances will likely 
peak at or about $8.8 billion at the end of 2012 and remain near that level in 
2013. As a result, we estimate that the ratio of funds from operations to debt 
is likely to remain in the mid-20% area in 2012 and strengthen to the low-30% 
area in 2013.

Liquidity
We assess Weatherford's overall liquidity as "adequate." Our assessment 
incorporates the following expectations and assumptions:

     -- The company had cash and equivalent balances of $381 million as of 
June 30, 2012.
     -- The company has a $2.25 billion senior unsecured revolving credit 
facility that matures in July 2016. We estimate that the company had slightly 
more than $1 billion of availability as of June 2012. 
     -- The company has $544 million of long-term debt that matures through 
the end of 2013.
     -- We forecast that the company's capital expenditures and working 
capital investment will likely outpace funds from operations by about $200 
million over the next 18 months.
     -- We expect the company's sources of liquidity cover uses by more than 
1.25x over the next 18 months.

Outlook
The negative outlook reflects our view that the company's credit protection 
could remain weak relative to expectations for the rating. We would consider a 
negative rating action if Weatherford's debt balances increase materially from 
current levels, such that FFO drops below 25% or we deem it likely that 
improvement in the company's credit protection will be delayed beyond our 
current expectations. Similar ratings pressure could occur if EBITDA margins 
decline to below 18%. Alternatively, we would consider a positive rating 
action in the event that the company is able to reduce debt and maintain FFO 
to debt of 40% to 45%.


Related Criteria And Research

     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
Ratings List
Rating Affirmed; Outlook Negative
                                        To                 From
Weatherford International Ltd.
 Corporate Credit Rating                BBB/Negative/A-2   BBB/Stable/A-2

0 : 0
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