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Tuesday, January 12, 2016

Weatherford's Financial Collapse Could Kill Halliburton-Baker Hughes Merger

From Seeking Alpha:
Schlumberger (NYSE:SLB), Halliburton and Baker Hughes are considered the top three oil services firms. Weatherford International (NYSE:WFT) is ranked number four, particularly for firms with high exposure to land drillers. Post-deal, it may be logical to assume that Weatherford could be strong enough to maintain a competitive landscape. However, in my opinion, Weatherford may not survive much longer amid a free fall in oil prices and $7.7 billion of debt. 
In Q3, Weatherford experienced a 6% sequential decline in revenue and incurred a $98 million pretax loss. Its North America operations (37% of revenue) are particularly concerning. Loss from operations were $54 million; this followed a $92 million loss in Q2. The competition is so cut throat that in Q3, Weatherford had to scale back two product lines - rentals and pressure pumping - due to "punitive economics." 
$7.7 Billion Debt Load Appears Untenable 
Weatherford built its number four position in the sector via acquisitions when oil prices were much higher. In the process, it also amassed $7.7 billion debt which is at junk levels. It has nearly the same amount of debt as Halliburton ($7.7 billion versus $7.8 billion), though its run-rate EBITDA is nearly one-third less ($1.4 billion versus $4.0 billion). With debt/run-rate EBITDA at over 5x, Weatherford has the worst balance sheet amongst its peers, including National Oilwell Varco (NYSE:NOV) and Oil States International (NYSE:OIS).
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