Q Investments Puts the Weatherford Board on Notice for Its History of Value Destruction and Broken Promises
Q Investments Intends to Ask Board to Explore All Alternatives if Weatherford's Planned $1 Billion Improvement in Operating Results Becomes Another Broken Promise
FORT WORTH, Texas, June 21, 2018 /PRNewswire/ -- A fund affiliated with Q Investments, L.P., announced today that it sent a letter to Weatherford International plc's (NYSE: WFT) Board of Directors. Q Investments has a long track record of protecting shareholder rights and successfully pursuing similar initiatives in numerous other publicly traded companies such as Jones Energy, Inc., Citadel Broadcasting, Corp., Houghton Mifflin Harcourt Co., Cedar Fair, L.P., and Quorum Health, Corp.
A full text of the letter follows below:
Q5-R5 Trading, Ltd.
In Care of Amalgamated Gadget, L.P., Investment Manager
301 Commerce Street, Suite 3200
Fort Worth, Texas 76102-4140
June 21, 2018
Via Federal Express
The Board of Directors
Weatherford International plc
2000 Saint James Place
Houston, Texas 77056
Dear Ladies and Gentlemen:
Weatherford International plc's stock price is testing lows not seen for more than two decades. Weatherford began 2016, at the height of the oil crisis, with an $8.39 stock price. Since then, Weatherford is down a staggering 60% while oil prices are up 79%, and Weatherford's three main competitors have all posted positive total returns.
Weatherford's Board of Directors may contend that it has taken the necessary steps to solve its problems by naming Mark McCollum as Chief Executive Officer. We acknowledge that Mr. McCollum comes with an impressive pedigree from his time at Halliburton Company as Chief Financial Officer and Chief Integration Officer in charge of integrating the then-contemplated acquisition of Baker Hughes Incorporated. He has worked to improve Weatherford's talent bench across upper management. In addition, our view is that he has said the "right things" in laying out a detailed roadmap towards a $1 billion improvement in operating results.
However, we believe that the market has made it clear that the actions taken by Weatherford's Board are woefully inadequate. Since the day after the Board announced Mr. McCollum's appointment as Chief Executive Officer, the stock price is down nearly 50%. We believe Weatherford has too much leverage and whatever incremental positive internal steps the Company can take will not solve the issue. Weatherford's leverage stands at far over 10x, as compared to competitors who are 2x to 4x levered, and its cash burn has exceeded $500 million in each of the past two fiscal years as compared to competitors who were all cash flow positive on a normalized basis. Not only does Weatherford's financial condition limit its ability to invest in new technologies and seize opportunities, a fact acknowledged by Mr. McCollum himself, but we believe the Company is also at risk of being shut out from the capital markets, leaving a restructuring as the only option!
Six of the ten Board members are still inexplicably in place from the disastrous Bernard Duroc-Danner era that resulted in a stock price decline of more than 90%, as his luster began to fade, and left in its wake a series of broken promises.
RECENT WEATHERFORD BROKEN PROMISES
| Promise |
Result |
|
| February 5, 2015 – "We fully expect to be free cash flow positive in 2015 and beyond" |
• |
Weatherford has generated negative $1.3 billion of free cash flow since this comment was made |
| February 4, 2016 – "We expect to generate between $600 million and $700 million of free cash flow in 2016, taking our net debt at the end of this year well below $6.5 billion and a targeted net debt level of below $6 billion by the end of 2017" |
• |
Weatherford burned more than $500 million of free cash flow in each of 2016 and 2017 |
| • |
Despite $1.4 billion of net divestitures and equity raises, net debt stands at $7.3 billion |
|
| October 26, 2016 – "With activity we will have fast rising EBITDA. We used to have $3 billion of EBITDA and with our [$1 billion] structural fixed cost revolution, we arguably could be about $4 billion or $1 billion a quarter." |
• |
Despite a surge in oil prices and rig activity, LTM EBITDA is under $600 million |
| April 28, 2017 – In regards to the goals of reducing debt to $3 billion by 2020: "The $3 billion is the right number, but it's, I think, it's the time. We need to get it done faster than that." |
• |
Two quarters later, Weatherford backtracked to the unambitious target of cutting debt-to-EBITDA ratios in half by the end of 2019 |
| October 24, 2017 – Weatherford confirmed that it "fully expects to close the previously announced OneStim joint venture with affiliates of Schlumberger Ltd. before year-end" |
• |
Without warning or explanation Weatherford scrapped the OneStim joint venture, which was expected by market analysts to create approximately $1 billion of value |
|
• |
Instead of entering into this value accretive joint venture, Weatherford sold its U.S. hydraulic fracturing business at what we believe is a bargain basement price |
|
|
• |
The announcement was apparently made at a time when the Company hoped no one would see it – December 29, 2017 at 4pm EST |
|
It boggles the mind that control of the Board has been left in the hands of the individuals who oversaw the business during the Duroc-Danner years of broken promises. Does it make sense that this Board recently appointed the longest tenured director, Bill Macaulay, as the Chairman of the Board? He has had a front-row seat as a board member for this almost unprecedented value destruction for approximately 20 years.
We believe the current dilapidated financial condition of the Company masks its underlying strong portfolio of businesses and technologies. We believe the combination of Weatherford's attractive technologies, global breadth and synergy potential makes the Company a terrific acquisition target at stock prices well above today's levels. The businesses of Artificial Lift, Fish & Remedial Services, Tubular Running Services and Managed Pressure Drilling are each crown jewel assets that we believe would bring numerous buyers to the table at relatively high valuations. Additionally, we believe each of Weatherford's peers could enjoy substantial synergies (based on our analysis of comparable transactions) in excess of 10% of Weatherford's sales.
If Mr. McCollum's commitment to a $1 billion improvement in operating results joins the list of broken promises, then we will ask the Board to start a process to explore all strategic alternatives, including a focus on selling the Company through an equity transaction to allow shareholders to continue to participate in the upside of the combined entity. We believe the most viable path would be to sell the entire Company; however, we would be open to any and all alternatives. Unless Mr. McCollum can deliver on the timeline he has laid out towards the $1 billion improvement, then we believe the status quo would be unsustainable since the Company's over-levered capital structure would destroy what small remaining value the shareholders have left.
As both an equity holder and a significant debt holder, we find it incomprehensible that such financial malpractice has been rewarded with six legacy Board members remaining in place since Mr. Duroc-Danner left. How are we and other shareholders to believe that Weatherford can right the errors of the past decade when those responsible are still sitting on the Board?
We hope that we can work together through this process, but we will evaluate all appropriate actions to protect and maximize value for all stakeholders.
Sincerely Yours,
Q5-R5 Trading, Ltd.
SOURCE Q Investments
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