Weatherford's Out of Bankruptcy and Undervalued

Weatherford International’s WFTLF new shares have begun trading following the company’s emergence from bankruptcy in December, and we’ve updated our view. Our fair value estimate is $70 per new share, of which about 70 million were issued, replacing all of the company’s old equity. Currently, the new shares are only trading over the counter, but the company expects to resume trading on the New York Stock Exchange by March at the latest.

Of Weatherford’s approximately $8.5 billion in prebankruptcy debt, about $7 billion was eliminated following completion of the bankruptcy proceedings. In exchange for this, senior noteholders received 99% of the new equity in the company, with prior shareholders receiving just 1%. We think this was a bad deal for prior shareholders, but they had virtually zero bargaining power once the company entered bankruptcy. A prolonged bankruptcy court fight would have only destroyed enterprise value and made the prior shareholders’ case harder. In any case, this recapitalization puts the new Weatherford in solid financial health. All remaining debt has a five-year maturity, and we project that net debt/EBITDA will fall below 2 times by the end of this year.

Currently, Weatherford shares are trading at half of what we think they’re worth. Even on an unleveraged basis, the company’s market value has cratered over the past two years. In mid-2018, Weatherford’s market-implied enterprise value was about $9 billion. Now, we estimate a market-implied enterprise value of about $3 billion, a 67% drop. Although peers have also seen large drops in share price over that period (30%-40% after adjusting for leverage), they have been easily eclipsed by Weatherford’s fall.

We grant that the company’s trip to bankruptcy caused some damage to its ongoing operations, and we have lowered our financial forecasts accordingly, particularly in the nearer term. We now forecast 12% cumulative revenue growth through 2023 using 2018 as a base, or 20% adjusted for divested businesses (assuming they contributed about $400 million in 2018 revenue). Our adjusted revenue growth runs slightly above our forecast for industry oil and gas capital expenditure growth of 16% but below our forecasts for peers, despite Weatherford’s potential for market share gains after years of mismanagement.

On the bottom line, we think our updated views are particularly conservative. We forecast $1.2 billion in 2023 (midcycle) EBITDA. The company achieved $830 million in annualized EBITDA in the second half of 2018 thanks to rapid accomplishment of management’s transformation plan. Meanwhile, management at that point had claimed another $700 million in incremental EBITDA benefit, which we think Weatherford would have been well along the way to realizing at present if not for the chaotic effects of being forced into bankruptcy in 2019. Furthermore, we expect solid industry tailwinds, including a pricing recovery, as global oil and gas capital expenditures continue to recover in coming years. Any revenue growth for Weatherford should yield high operating income incrementals, given the company’s cutting of lower-quality business lines.

Our average covered oilfield services company is trading at about a 20% discount currently, which we believe is due to the market’s underrating of oil and gas capital expenditure recovery--particularly in international markets--in the coming years. However, we are unable to explain exactly why Weatherford’s shares are so much cheaper. Investors are probably bitter, having been burned by the company many times over the past decade. Bondholders, which own 99% of the new shares of the company, are likely less than enthusiastic about holding equity, despite its intrinsic value.

Our updated fair value uncertainty rating for Weatherford is very high, a notch above most peers’ rating of high. This is due to our uncertainty about the degree of damage done to the long-term value of Weatherford by the past year of financial distress and bankruptcy proceedings.