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WFT > SEC Filings for WFT > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for WEATHERFORD INTERNATIONAL LTD./SWITZERLAND

Form 10-Q for WEATHERFORD INTERNATIONAL LTD./SWITZERLAND


29-Apr-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") begins with an executive overview that provides a general description of our Company, a synopsis of industry market trends, insight into management's perspective of the opportunities and challenges we face and our outlook for the remainder of 2014. Next, we analyze the results of our operations for the three months ended March 31, 2014 and 2013, including the trends in our business and review our liquidity and capital resources. We conclude with an overview of our critical accounting policies and estimates and a summary of recently issued accounting pronouncements. The "Company," "we," "us" and "our" refer to Weatherford International Ltd., a Swiss joint-stock corporation and its subsidiaries on a consolidated basis.

The following discussion should be read in conjunction with the financial statements included with this report and our financial statements and related MD&A for the year ended December 31, 2013 included in our Annual Report on Form 10-K, as amended. Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, please review the section entitled "Forward-Looking Statements" and the section entitled "Item 1A. - Risk Factors."

Overview

General

We conduct operations in over 100 countries and have service and sales locations in nearly all of the oil and natural gas producing regions in the world. Our operational performance is reviewed on a geographic basis and we report the following regions as separate, distinct reporting segments: North America, MENA/Asia Pacific, Europe/SSA/Russia and Latin America.

We principally provide equipment and services to the oil and natural gas exploration and production industry, both on land and offshore, through our two product service line groups: (1) Formation Evaluation and Well Construction and
(2) Completion and Production, which together comprise a total of 15 service lines.

Formation Evaluation and Well Construction service lines include Controlled-Pressure Drilling and Testing, Drilling Services, Tubular Running Services, Drilling Tools, Integrated Drilling, Wireline Services, Re-entry and Fishing, Cementing, Liner Systems, Integrated Laboratory Services and Surface Logging.

Completion and Production service lines include Artificial Lift Systems, Stimulation and Chemicals, Completion Systems and Pipeline and Specialty Services.

We may sell our products and services separately or may bundle them together to provide integrated solutions, up to and including integrated well construction where we are responsible for the entire process of drilling, constructing and completing a well. Our customers include both exploration and production companies and other oilfield service companies. Depending on the service line, customer and location, our contracts vary in their terms, provisions and indemnities. We earn revenues under our contracts when products and services are delivered. Typically, we provide products and services at a well site where our personnel and equipment may be located together with personnel and equipment of our customer and third parties, such as other service providers. Our services are usually short-term in nature; day-rate based and cancellable should our customer wish to alter the scope of work. Consequently, our backlog of firm orders is not material to the Company.


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Industry Trends

Changes in the current and expected future prices of oil and natural gas
influence the level of energy industry spending. Changes in expenditures result
in an increased or decreased demand for our products and services. Rig count is
an indicator of the level of spending for the exploration for and production of
oil and natural gas reserves. The following chart sets forth certain statistics
that reflect historical market conditions:
                                                          North
                                                         American      International Rig
                  WTI Oil (a)    Henry Hub Gas (b)    Rig Count (c)        Count (c)
March 31, 2014         101.58                 4.37            2,327                1,337
December 31, 2013       98.42                 4.19            2,129                1,320
March 31, 2013          97.23                 4.02            2,289                1,287

(a) Price per barrel of West Texas Intermediate ("WTI") crude oil of the date indicated at Cushing Oklahoma - Source: Thomson Reuters

(b) Price per MM/BTU as of the date indicated at Henry Hub Louisiana - Source: Thomson Reuters

(c) Average rig count for the period indicated - Source: Baker Hughes Rig Count

Oil prices increased during the first three months of 2014, ranging from a high of $104.92 per barrel in early March to a low of $91.89 per barrel in early January. Natural gas ranged from a high of $5.47 MM/BTU in late January to a low of $3.98 MM/BTU in early January. Factors influencing oil and natural gas prices during the period include hydrocarbon inventory levels, realized and expected global economic growth, realized and expected levels of hydrocarbon demand, levels of spare production capacity within the Organization of Petroleum Exporting Countries ("OPEC"), weather and geopolitical uncertainty.

Outlook

In 2014, we expect to achieve improved profitability by focusing the organization on growing our core businesses, making our cost base more efficient, divesting our non-core businesses and reducing our debt.

We expect revenue growth in North America, Europe/SSA/Russia and MENA/Asia Pacific regions while Latin America is expected to decline. Overall margins will improve as a result of lower costs and growth, primarily in our more profitable core businesses. The revenue growth and margins will show improvements throughout the year, but will be stronger in the second half of 2014.

In an effort to make our cost base more efficient, we have completed the initial phase of our previously announced cost reduction initiatives. We have identified over 6,600 positions for reduction, with expected annualized pre-tax cost savings of approximately $450 million. This reduction remains on track to be substantially completed during the first half of 2014. Our strategic business reviews are on-going and we have started eliminating select operating locations identified in these reviews. We expect these actions will bring additional costs savings, both in the form of headcount reductions and other savings that will enable us to deliver on the 7,000 headcount reduction target and the $500 million targeted annualized pre-tax cost savings.

We continually seek opportunities to maximize efficiency and value through various transactions, including purchases or dispositions of assets, businesses and investments or joint ventures. We evaluate our disposition candidates based on the strategic fit within our business and/or objectives. In late 2013, we announced our intention to divest certain non-core business lines (land drilling rigs, drilling fluids, pipeline and specialty services, testing and production services and wellheads) and target dates for completing these divestitures. Upon completion, the cash proceeds from these divestitures will be used to pay down debt.

In 2014 our effective tax rate is expected to be between 25% and 30% and will depend on the geographical mix of earnings. Capital expenditures are estimated at $1.3 billion, or approximately 8% of revenue, for 2014 and will include core and non-core product lines until the divestitures are complete. The continued focus on reducing working capital coupled with improved earnings is expected to generate positive free cash flow during 2014 that will be used primarily to reduce debt.

We believe the long-term outlook for our businesses is favorable. As well production decline rates accelerate and reservoir productivity complexities increase, our clients will continue to face growing challenges securing desired rates of production growth. These challenges increase our customers' requirements for technologies that improve productivity, efficiency and increase demand


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for our products and services. These factors provide us with a positive outlook for our core businesses over the longer term. The level of improvement in our businesses in the future will continue to depend heavily on pricing and volume increases, our control of costs and our ability to further penetrate existing markets with our newly developed technologies, as well as to successfully introduce these technologies to new markets.

Results of Operations

The following charts contain selected financial data comparing our consolidated
and segment results from operations for three months ended March 31, 2014 and
2013:
                                                 Three Months Ended March 31,
 (Dollars in millions, except per share data)       2014               2013
Revenues:
North America                                 $       1,610       $       1,692
MENA/Asia Pacific                                       781                 785
Europe/SSA/Russia                                       664                 633
Latin America                                           541                 727
                                                      3,596               3,837
Operating Income (Expense):
North America                                           194                 224
MENA/Asia Pacific                                         3                  42
Europe/SSA/Russia                                        54                  65
Latin America                                            91                  98
Research and Development                                (69 )               (67 )
Corporate Expenses                                      (47 )               (48 )
Restructuring Charges                                   (70 )                 -
Other Items                                             (26 )               (35 )
                                                        130                 279

Interest Expense, Net                                  (126 )              (131 )
Devaluation of Venezuelan Bolivar                         -                (100 )
Other, Net                                               (9 )               (13 )
Provision for Income Tax                                (27 )                (5 )
Net Income (Loss) per Diluted Share                   (0.05 )              0.03
Depreciation and Amortization                           351                 346

Revenues

The following chart contains the percentage distribution of our consolidated
revenues by product service line group for three months ended March 31, 2014 and
2013:
                                             Three Months Ended March 31,
                                                2014                2013
Formation Evaluation and Well Construction         60 %                 59 %
Completion and Production                          40                   41
Total                                             100 %                100 %

Consolidated revenues decreased $241 million in the first quarter of 2014 compared to the first quarter of 2013. International revenues decreased $159 million, or 7%, in first quarter of 2014 compared to the first quarter of 2013, despite a 4% increase in


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international average rig count. International revenues include revenues from all segments other than North America. Decreased activity in Latin America, primarily related to the completion of project work in Mexico, and the continued impact of our self-imposed capital discipline driven activity reductions in Venezuela, were the main factors causing the decrease in revenues compared to the same period in 2013. Revenue in our North America segment decreased $82 million, or 5%, in the first quarter of 2014 compared to the first quarter of 2013, despite a 2% increase in North American average rig count. The decrease in revenue was due to reduced demand resulting from the severe winter weather conditions in the United States during the first quarter of 2014.

Operating Income

Consolidated operating income decreased $149 million, or 53%, in the first quarter of 2014 compared to the first quarter of 2013, primarily due to restructuring charges of $70 million, as well as a $43 million increase in losses associated with our legacy contracts in Iraq. The remainder of the operating income decline was principally due to a decline in North America margins reflecting severe winter weather related activity stoppages in the United States Land market, partially offset by the normal seasonal improvement in Canada. Despite the decline in Latin America revenues, its operating income remained relatively flat due to the completion of lower margin project work in Mexico and a continued focus on higher margin activity in Argentina and Brazil.

Other items for the three months ended March 31, 2014 include $26 million primarily related to professional fees related to the divestiture of our non-core businesses, the remediation of our material weakness related to income taxes and our planned redomestication.

Other items for the three months ended March 31, 2013 include income tax restatement and material weakness remediation expenses of $21 million, severance, exit and other charges of $20 million (which includes $5 million in legal and professional fee incurred in conjunction with our prior investigations), partially offset by a $6 million gain related to the sale of our industrial screen business.

Devaluation of Venezuelan Bolivar

On February 8, 2013, the Venezuelan government announced its intention to further devalue its currency effective February 13, 2013 at which time the official exchange rate moved from 4.30 per dollar to 6.30 per dollar for all goods and services. In connection with this devaluation, we recognized a charge of $100 million in the first quarter of 2013 for the remeasurement of our net monetary assets denominated in the Venezuelan bolivar at the date of the devaluation, which was not tax deductible in Venezuela.

In early 2014, the Venezuelan government announced its intent to expand the types of transactions that would be subject to the Venezuela's Complementary System of Foreign Currency Acquirement ("SICAD") rate, and created a National Center of Foreign Commerce ("CENCOEX") that would absorb changes to the existing multiple currency exchange rate mechanisms that may be available for a company to exchange funds. In February, the government officially dissolved CADIVI and established CENCOEX, giving them the authority to determine the sectors that will be allowed to buy U.S. dollars in SICAD auctions, and subsequently introduced a more accessible SICAD 2 daily auction exchange market. In March 2014, SICAD 2, a market-based, state-run exchange, was initiated by the Central Bank of Venezuela.

Despite the recent announcements made by the Venezuelan government, there remains a significant degree of uncertainty as to which exchange markets might be available for particular types of transactions. We have not historically participated in the exchanges made available for access to U.S. dollars nor do we have contractual relationships that would require the use of a particular exchange. Because we have sufficient Venezuelan bolivar fuertes ("bolivars") to settle our bolivar denominated obligations and similarly sufficient U.S. dollars to settle our U.S. dollar denominated obligations, we currently have no forecasted need to participate in the auction-based SICAD exchanges nor sufficient indication that we will ultimately be required to participate in those exchanges and as such, will continue to utilize the rate published in the primary CADIVI/CENCOEX exchange at March 31, 2014 which is 6.3 Venezuelan bolivars per U.S. dollar. The other two legal exchange rates are approximately 11 and 50 Venezuelan bolivars, respectively, to the U.S. dollar. As of March 31, 2014, we had a net monetary asset position denominated in Venezuelan bolivars of approximately $233 million, comprised primarily of accounts receivable and current liabilities. Management is closely monitoring the applicability and viability of this new exchange system.


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Interest Expense, Net

Interest expense, net decreased $5 million, or 4%, in the first quarter of 2014 compared to the first quarter of 2013 primarily due to a decrease in our higher coupon senior notes partially offset by an increase in lower cost short-term borrowings in 2014.

Income Taxes

We estimate our annual effective tax rate based on year-to-date operating results and our forecast of operating results for the remainder of the year, by jurisdiction, and apply this rate to the year-to-date operating results. If our actual results, by jurisdiction, differ from the forecasted operating results our effective tax rate can change affecting the tax expense for both successive interim as well as the annual tax results. For the three months ended March 31, 2014, we had a tax provision of $27 million on loss before taxes of $5 million. Our results were impacted by discrete income before tax items, including restructuring charges and project losses of approximately $116 million, with no significant tax benefit.

We are continuously under tax examination in various jurisdictions. We cannot predict the timing or outcome regarding resolution of these tax examinations or if they will have a material impact on our financial statements. We continue to anticipate a possible reduction in the balance of uncertain tax positions by approximately $40 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations.

For the three months ended March 31, 2013, we had a tax provision of $5 million on income before taxes of $35 million. Our effective tax rate for the three months ended March 31, 2013 includes one-time tax benefits due to the devaluation of the Venezuelan bolivar, tax restructuring benefit, enactment of the American Taxpayer Relief Act and decreases in reserves for uncertain tax positions due to statute of limitation expiration and audit settlements, which decreased our effective tax rate for the period to 14%.

Restructuring Charges

In the first quarter of 2014, we announced, as an important step in making our cost base more efficient, a cost reduction plan ("the Plan"), which includes a worldwide workforce reduction that is expected to involve approximately 7,000 employees associated with our core businesses. The restructuring charge for the three months ended March 31, 2014 includes one-time termination (severance) benefits of $66 million and other restructuring charges of $4 million, including contract termination costs and other associated costs that have been or will be incurred. The Company currently estimates that it will recognize pre-tax charges of $125 million to $150 million associated with the Plan. As of March 31, 2014, we have completed approximately 56% of our planned reduction in workforce.

The Plan resulted in a charge of $70 million, $3 million of which is related to the vesting of stock based compensation in accordance with the related employment agreements and $36 million was paid prior to March 31, 2014. We anticipate completing our Plan by the end of 2014.

The following table presents the components of the restructuring charges by segment:

                                                                   For the Three Months Ended March 31, 2014
                                                                                                                  Corporate and
(Dollars in                                                                                                        Research and
millions)              North America       MENA/Asia Pacific           Europe/SSA/Russia       Latin America       Development         Total
Severance and other
restructuring
charges              $             9     $                 5         $                20     $            20     $           16     $       70

The restructuring charges gave rise to certain future liabilities, the components of which are summarized below, and relate to severance accrued as part of the Plan that will be paid pursuant to the respective severance arrangements and statutory requirements.

                                                                          March 31, 2014
                                                                                                               Corporate and
(Dollars in                                                                                                     Research and
millions)              North America       MENA/Asia Pacific       Europe/SSA/Russia       Latin America        Development          Total
Severance and other
restructuring
liability            $             1     $                 3     $                19     $             1     $              7     $       31


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Segment Results

North America

North America segment revenues decreased $82 million, or 5%, in the first quarter of 2014 compared to the first quarter of 2013. North America average rig count increased 2% over the comparable period. The decrease in revenue was due to reduced demand associated with the severe winter weather conditions in the United States that impacted several of our product lines. These declines abated in the latter part of the quarter and were partially offset by an increase in demand for artificial lift products.

Operating income decreased $30 million, or 13%, in the first quarter of 2014 compared to the first quarter of 2013. Declines in operating margin are driven by weather related work stoppages, which contributed to completions and formation evaluation margin declines. Operating margins were 12% in the first quarter of 2014 compared to 13% in the first quarter of 2013. For the three months ended March 31, 2014, we recognized restructuring charges of $9 million in North America.

MENA/Asia Pacific

MENA/Asia Pacific revenues decreased $4 million, or 1%, in the first quarter of 2014 compared to the first quarter of 2013. The lower revenue was due to marginally lower demand for our non-core product lines primarily in Iraq and the Gulf countries.

Operating income decreased $39 million during the first quarter of 2014 compared to the first quarter of 2013. The 2014 decrease in operating income is primarily due to additional losses on our legacy contracts in Iraq. During the first quarter of 2014, we recognized additional estimated project losses of $26 million related to our two percentage of completion contracts. Total estimated losses on these two projects, one of which was completed during the first quarter, were $333 million at March 31, 2014. Total losses from our legacy contracts in Iraq, inclusive of the percentage of completion contracts, were $46 million for the three months ended March 31, 2014 compared to $3 million for the three months ended March 31, 2013. Apart from these results, revenue and margin improvements in Saudi Arabia offset weather related declines in China and Australia. For the three months ended March 31, 2014, we recognized restructuring charges of $5 million in MENA/Asia Pacific.

Europe/SSA/Russia

Revenues in our Europe/SSA/Russia segment increased $31 million, or 5%, in the first quarter of 2014 compared to the first quarter of 2013. The increase in revenues were primarily related to increased activity in Europe and new contracts starting up in Sub-Sahara Africa, which were partially offset by lower activity in Russia where the winter weather conditions were more severe than normal. The region realized strong performances due to increased demand primarily for our well construction products and services.

Operating income decreased $11 million, or 17%, in the first quarter of 2014 compared to the first quarter of 2013. Operating margins were 8% in the first quarter of 2014 and 10% in the first quarter of 2013. The decrease in operating income and margins was driven by a reduction in the equity earnings from our investment in Borets that was sold in the fourth quarter of 2013 and higher operating costs for our formation evaluation and artificial lift service lines. For the three months ended March 31, 2014, we recognized restructuring charges of $20 million in Europe/SSA/Russia including $4 million in contract termination costs.

Latin America

Revenues in our Latin America segment decreased $186 million, or 26%, in the first quarter of 2014 compared to the first quarter of 2013 largely related to the completion of project work in Mexico, and the continued impact of our self-imposed capital discipline driven activity reductions in Venezuela.

Operating income decreased $7 million, or 7%, in the first quarter of 2014 compared to the first quarter of 2013 resulting from a decline in activity associated with lower demand for our artificial lift and formation evaluation services resulting from the completion of project work in Mexico, and lower demand for services in Venezuela. This was partially offset by improved margins for our artificial lift products. Operating margins were 17% in the first quarter of 2014 and 13% in the first quarter of 2013. The improvement in the operating margins was primarily due to the completion of lower margin project work in Mexico and a continued focus on higher margin activity in Argentina and Brazil. For the three months ended March 31, 2014, we recognized restructuring charges of $20 million in Latin America.


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Liquidity and Capital Resources

Cash Flows

At March 31, 2014, we had cash and cash equivalents of $367 million compared to
$435 million at December 31, 2013. The following table summarizes cash flows
provided by (used in) each type of activity, for the three months ended March
31, 2014 and 2013:
                                              Three Months Ended March 31,
(Dollars in millions)                            2014                2013
Net Cash Used in Operating Activities     $         (406 )       $       (11 )
Net Cash Used in Investing Activities               (274 )              (320 )
Net Cash Provided by Financing Activities            605                 318

Operating Activities

Cash flows used in operating activities were $406 million in the three months ended March 31, 2014. Our net income decreased by $62 million for the three months ended March 31, 2014 compared to the net income for the three months ended March 31, 2013. Cash flow used in operating activities were driven by the payment of $253 million to settle the FCPA/sanctioned country matters, . . .

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