Weatherford International plc (WFT)

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Weatherford International (WFT)

Q4 2012 Earnings Call

February 27, 2013 8:30 am ET

Executives

Bernard J. Duroc-Danner - Chairman, Chief Executive Officer, and President

John H. Briscoe - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Ole H. Slorer - Morgan Stanley, Research Division

James Knowlton Wicklund - Crédit Suisse AG, Research Division

William A. Herbert - Simmons & Company International, Research Division

James C. West - Barclays Capital, Research Division

Nigel Browne - Macquarie Research

Presentation

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Fourth Quarter 2012 Earnings Conference Call. [Operator Instruction] As a reminder, ladies and gentlemen, today's call is being recorded. I would now like to turn the conference over to Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Sir, you may begin your conference.

Bernard J. Duroc-Danner

Thank you. Good morning, everyone. As usual, John will read his prepared comments, and I will read mine then we'll open it to Q&A. John, please.

John H. Briscoe

Thank you, Bernard, and good morning, everyone. Before my prepared comments, I would like to remind listeners this call contains forward-looking statements within the meaning of applicable securities laws and also includes non-GAAP financial measures. A detailed disclaimer related to our forward-looking statements is included in our press release, which has been filed with the SEC and is available on our website at weatherford.com or upon request. Similarly, a reconciliation of excluded items and non-GAAP financial measures is included in our press release and also on our website.

In the fourth quarter 2012, we recorded a net loss of $122 million or net income of $8 million on a non-GAAP basis compared to non-GAAP net income for the third quarter of 2012 of $140 million, as detailed in the non-GAAP reconciliation table in our earnings release. Fourth quarter net income was unfavorably impacted by the excluded items highlighted in our press release totaling $111 million before tax and $130 million after-tax. To understand our overall Q4 results, you should note that our adjusted earnings before tax were $200 million as detailed on the non-GAAP reconciliation included in our earnings release. Also impacting our fourth quarter operating results were onetime charges of about $30 million on a pretax basis for various balance sheet out-of-period items, giving adjusted Q4 operating results before tax of $230 million. If you use a 45% effective tax rate, you get about $0.17 per share of EPS or roughly in line with consensus. Putting it another way, the 92% tax rate versus the guidance of 45% impacts our Q4 EPS by about $0.14.

The excluded items for the fourth quarter on an after-tax basis were primarily composed of $64 million in losses, including a $34 million tax impact associated with legacy lump sum contracts in Iraq, $43 million related to additional professional fees incurred in Q4 in connection with our income tax restatement efforts and $23 million for severance, exit and other charges. We have isolated the losses incurred in Iraq in Q4 and a lump sum -- on lump sum contracts as an excluded item to clarify how MENA, Asia Pacific operations are performing and the impact of these contracts on the region. The excluded losses relate to our early production facility, or EPF; contracts and turnkey drilling contracts, all in Iraq, and all of which were entered into by a prior hemisphere management team in a different phase of the Iraq market development. Our Zubair EPF contract continues on track, and we expect it to be profitable, but we will exclude it as well.

Fourth quarter revenues of $4.1 billion were 6% higher sequentially and 9% higher than the same period last year. North American revenue was down 1% versus the fourth quarter of 2011 and down 2% sequentially. International revenues were up 18% versus the same quarter of 2011 and up 13% sequentially. Adjusted segment operating income of $469 million was down 23% compared to the fourth quarter of 2011 and down $30 million or 9% sequentially. Segment operating income margins of 12% were down 4% compared to the fourth quarter 2011, while declining 2% sequentially.

North American operating margins for the quarter declined 380 basis points sequentially to 13%, primarily due to the decline in the U.S. rig count and softness in Canada. Pressure pumping margins declined further. International operating margins were down 40 basis points sequentially to 10%. Sequential international margin improvements in Latin America and MENA were more than offset by declines in Sub-Saharan Africa and declines in Russia and Asia.

During the fourth quarter 2012, we generated EBITDA, defined as non-GAAP operating income plus depreciation and amortization, of $699 million, including depreciation and amortization of $343 million compared to EBITDA of $717 million with depreciation and amortization of $329 million in the prior quarter. This represents a decline in EBITDA of 3% sequentially. Capital expenditures were $478 million for the quarter, net of $29 million of lost-in-hole revenue, representing approximately 12% of revenue. This is down from $540 million or 11% sequentially and in line with our expectations of a 10% CapEx reduction in Q4. Full year 2012 CapEx of $2.2 billion was 14% of revenue.

For 2013, we expect capital expenditures will be between 8% and 12% of 2013 revenue. Net debt for the quarter decreased $207 million. This represents the largest positive free cash flow from operations in a single quarter in over 30 months. Our DSO metric reflects a decrease of 6 days from 92 days in Q3 to 86 days in Q4 and in line with our target of 85 days. DSI decreased by 6 days from 87 days at Q3 to 81 days in Q4 and beat our target of 86 days.

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