Fitch Assigns First-Time 'BBB-' Ratings to Weatherford International plc

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned ratings to Weatherford International plc WFT and its subsidiaries as follows:

Weatherford International plc.

--Long-term IDR at 'BBB-'.

Weatherford International Ltd. (Bermuda)

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Senior unsecured bank facility at 'BBB-';

--Short-term IDR at 'F3';

--Commercial paper program at 'F3'.

Weatherford International, LLC (Delaware)

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Negative.

The Negative Outlook reflects the implementation and execution risks associated with management's strategic shift to focus on returns and improve the balance sheet in the current oil & gas market downcycle. While the company's track record suggests heightened risk, Fitch views management's targets to be generally achievable with implementation and execution risks currently consistent with a 'BBB-' rating.

KEY RATING DRIVERS

Weatherford's ratings consider its position as the fourth largest international oil & gas services company, geographic diversification (North America [N.A.] contributes less than 50% of consolidated 2014 revenues), business lines with favorable through-the-cycle revenue and growth prospects, returns focused strategic initiatives, and projected positive free cash flow profile leading to debt reduction. These considerations are offset by the company's mixed asset quality, historical track record that suggests heightened execution risk, and weaker forecasted through-the-cycle leverage metrics (Fitch-calculated debt/EBITDA of 3.0x as of Dec. 31, 2014; Fitch base case forecasts debt/EBITDA of 3.6x in 2015).

FAVORABLE RETURNS FOCUS, BUT EXECUTION RISK REMAINS

Weatherford's strategic shift to focus on returns was, in retrospect, well timed given the downcycle. Management has focused on divesting lower margin, non-core businesses, growing core businesses, lowering the cost structure, generating positive free cash flow from operations, and reducing net debt. The company has had mixed results to-date. Successes came in the form of divestitures, cost reductions, and debt repayments. However, overall growth has been elusive and will be challenged in the downcycle, while free cash flow targets have been missed in consecutive years.

The company has laid out a plan to help 'right-size' and offset the effects of the downcycle that include additional cost reductions, capital spending rationalization, and working capital improvements leading to positive free cash flow and further debt reductions. Management expects significant cost savings in 2015 in the form of headcount (8,000 positions targeted) and procurement cost reductions that are underway and appear attainable. A budgeted 38% year-over-year reduction in 2015 capital spending is supported by lower overall activity, a corporate culture transition that incentivizes cost discipline and competitiveness, and years of infrastructure-related capex overspend. Management's 2015 working capital improvement target seems reasonable when compared to historical downcycles.

DOWNCYCLE LIMITS GROWTH PROSPECTS; SUPPORTIVE ELEMENTS IN PLACE

Fitch views a longer, slower N.A. recovery profile as likely with oil & gas market pricing support for a larger scale ramp-up in activity to be several years into the future. As a consequence, Weatherford's N.A. revenue profile will be subject to lower volume and heightened pricing pressure for some time. International markets are expected to remain mixed in the near term but demonstrate more resiliency. The Middle East and Sub-Saharan Africa generally exhibit more opportunities for the company than the contraction/stagnation being experienced in Latin America, Europe and Asia.

Weatherford's suite of products and services are mixed with a number of undifferentiated, lower growth, and scale dependent business lines. However, Fitch recognizes that certain business lines provide favorable through-the-cycle revenue and growth prospects, such as artificial lift (over 20% of core revenues in 2014) and well construction (35%). Another consideration is the opportunities that the Halliburton-Baker Hughes merger could provide as exploration and production (E&P) customers may seek to diversify service providers in some business lines following the merger.

POSITIVE FREE CASH FLOW PROFILE AND DEBT REDUCTION FORECASTED

Fitch's base case, assuming a WTI price of $50, forecasts Weatherford will be approximately $375 million and $225 million FCF positive in 2015 and 2016, respectively. These FCF estimates consider operating cost savings, capex rationalization efforts, and near-term working capital improvement gains. Fitch expects the company to allocate all surplus FCF towards debt repayment over the medium-term. Fitch's base case results in heightened debt/EBITDA metrics, mainly due to lower through-the-cycle EBITDA results, of 3.6x in 2015. Thereafter, Fitch's base case forecasts that the leverage profile will improve to 3.2x in 2016 and fall below 3.0x thereafter with higher oil prices resulting in improved pricing power and, possibly, modest market share gains in some segments.

ADEQUATE LIQUIDITY POSITION

Weatherford had cash and equivalents of $474 million, as of Dec. 31, 2014, with most held by foreign subsidiaries. Supplemental liquidity is principally provided by the company's $2.25 billion senior unsecured credit facility due July 2016 and commercial paper program. No revolver balances were outstanding as of Dec. 31, 2014, but availability has been reduced to under $2 billion by outstanding commercial paper ($245 million) and letters of credit ($30 million). The commercial paper program is sized to the revolving credit facility. Additional liquidity is provided by the company's $400 million, 364-day term loan facility ($175 million outstanding balance as of Dec. 31, 2015) maturing in April 2015, as well as other short-term facilities with $257 million outstanding as of Dec. 31, 2014. Fitch assumed repayment of the 364-day term loan facility with the credit facility.

MATURITIES PROFILE, COVENANTS, AND GUARANTEES

Over the next five years, Weatherford has $350 million (5.5% senior notes), $600 million (6.35% senior notes), $500 million (6% senior notes), and $1 billion of debt maturing in 2016, 2017, 2018, and 2019, respectively. The company has recently pursued open market debt repurchases and purchased approximately $200 million ($139 million in Q4 2014 and another $61 million in January 2015) of long-term debt. Management intends on continuing to be opportunistic with future open market debt repurchases.

The company's main financial covenant is a maximum debt-to-capitalization ratio of 60% (Fitch-calculated estimate of 52% as of Dec. 31, 2014) contained in the revolver. Other covenants contained in the indentures governing the senior notes restrict the ability to incur additional liens, engage in sale-leaseback transactions, and merge, consolidate, or sell assets, as well as change in control provisions. Guarantees have been provided by and between the Bermuda and Delaware affiliates for all senior unsecured debt effectively establishing cross-guarantees. Additionally, Weatherford has guaranteed all obligations of its affiliates. All unsecured debt is pari passu.

MANAGEABLE OTHER CONTINGENT LIABILITIES

Weatherford's pension obligations were underfunded by $164 million for the year-ended 2014. Fitch believes that pension funding requirements are manageable relative to funds from operations and pension contributions. The company had over $1.8 billion in other contingent obligations on a multi-year, undiscounted basis as of Dec. 31, 2014. These obligations consisted of noncancellable operating lease payments ($1.1 billion) and purchase obligations ($708 million). Fitch does not consider the obligations as material credit concerns.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--WTI oil price that trends up from $50/barrel in 2015 to $60/barrel in 2016 and a long-term price of $75/barrel;

--Henry Hub gas that trends up from $3/mcf in 2015 to $3.25/mcf in 2016 and a long-term price of $4.50/mcf;

--Global oilfield services market contraction with select Eastern Hemisphere markets exhibiting more resiliency resulting in consolidated revenue declines in the upper teens for 2015 with a modest mid-single digit return to growth in 2016 with higher oil prices resulting in improved pricing power and, possibly, modest market share gains in some segments;

--Realization of the margin benefits associated with its lower margin, non-core divestiture program and operating cost saving initiatives throughout 2015 resulting in less margin volatility than the last cycle with an improving profile thereafter;

--Capital expenditures of $900 million in 2015, consistent with management guidance, supported by reduced activity and rationalization initiatives. Capex going forward should also benefit from legacy infrastructure-related capex overspend limiting growth-oriented capital spending;

--Application of surplus cash to debt repayment;

--Retention of international rig fleet (a targeted 2014 non-core divestiture).

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Track record of achieving operational and financial targets with material reductions in debt outstanding;

--Favorable oil & gas services outlook supported by market pricing and/or activity level improvements;

--Progress in achieving greater geographical diversification that reduces N.A.'s proportional share of consolidated revenues/margins;

--Mid-cycle debt/EBITDA of 2.0x-2.5x on a sustained basis.

Fitch does not anticipate a positive rating action over the medium term given the implementation stage of management's strategic initiatives and current weak oil & gas pricing environment.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Failure to achieve management's operating and capital cost, free cash flow, and debt reduction targets signaling execution issues;

--Continued weak market pricing and/or depressed activity levels that prolong a recovery in oilfield services demand;

--Acquisitions and/or shareholder friendly actions that delay planned deleveraging;

--Mid-cycle debt/EBITDA of 3.0x-3.5x on a sustained basis.

Negative rating actions remain a possibility over the near term and will be closely linked to the implementation and execution of management's strategic shift to focus on returns and improve the balance sheet in the current oil & gas market downcycle.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Fitch Oil and Gas Assumptions Summary Feb. 2015' (Feb. 11, 2015);

--'U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs Followed by Longer, Slower Recovery)' (Feb. 5, 2015);

--'Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show Up in 2014 Numbers)' (March 24, 2015);

--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014).

Applicable Criteria and Related Research:

Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055

Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show Up in 2014 Numbers)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863880

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Fitch Oil and Gas Assumptions Summary Feb 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009

U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs Followed by Longer, Slower Recovery)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982994

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