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Bonds Signal Pain Ahead For Weatherford
Aug. 25, 2015 4:45 PM ET | 8 comments | About: Weatherford International Ltd. (WFT)
Disclosure: I am/we are short WFT. (More...)
Summary
•Weatherford's stock is down about 60% over the past year. WFT still trades at 8.8x run-rate EBITDA and is hardly cheap.
•Revenue and EBITDA declined by double-digits in Q2 and oil prices have hit 6-year lows.
•Principal payments on $7.8B debt are scheduled to start in 2016, and could cause liquidity strain.
•Weatherford's long-dated bond yields are 602 basis points above U.S. treasuries, up from 432 basis points last month.
•Bonds signal pain ahead for Weatherford. I believe them.
Bondholders tend to be more sophisticated than equity holders. They also tend to represent institutions and are more plugged in than your average investor. What bondholders think may be not be reflected in stock prices until months later. I have been writing about Weatherford's (NYSE:WFT) future liquidity strain for a few weeks now, so I decided to see what the bond market had to say.
The Bond Market Signals Pain Ahead
As of August 20, 2015 the company's bonds trade as low as 86 cents on the dollar. The bonds with the earliest maturity trade at or above par, while most of the longer-dated bonds -- trade below par. The longer the maturity, the more risk bondholders take that they will not be repaid.
The following chart illustrates the discount to where the bonds are trading:
Source: Shock Exchange, E*TRADE
The average price for the company's bonds declined from $101 on July 22nd to $97 on August 22nd, signaling a shift in bondholder sentiment. Average yields also increased from 6.0% in July to 6.3% in August. The 5.5% bonds maturing in February 2015 have a yield of 0.83%. Five of the company's bonds have yields of 7.78% or higher; the 9.9% bond maturing in 2039 has the highest yield at 8.76%, up from 8.13% a month earlier.
According to the EIA the spread between high yield bonds for energy companies and treasuries increased in the second half of the year. The increase reflected investors' increased risk after crude oil prices declined in Q2 2014. The spread for energy bonds reached a high of 1061 basis points in December, and stood at just over 800 basis points in mid-July. The spread above 30 year treasuries for Weatherford's most expensive bond was 602 basis points last week, up from 432 basis points a month ago.
What Changed?
The spread above treasuries for Weatherford's priciest bonds increased about 170 basis points in one month. What changed? On July 22nd the company delivered what I would describe as bleak Q2 results. Revenue and EBITDA fell Q/Q by 15% and 25%, respectively. The company's debt/run-rate EBITDA also rose to about 5.2x, increasing the likelihood of a ratings downgrade within the next six months. Secondly, oil prices have continued to slide as WTI reached a 6 year low. China's recent decision to devalue its currency did not help the outlook for future oil demand.
Principal payments on the company's $7.8 billion debt begin next year. $395 million is due in 2016 and about $1.1 billion from 2017 to 2018. I project liquidity strain for the company as cash dwindles from $611 million at Q2 2015 to approximately $101 million by the end of 2016. WFT is down about 60% over the past year to $7.70. The stock appears cheap compared to a year ago; however, WFT still trades at 8.8x trailing 12 months EBITDA which is hardly cheap given its financial straits. The bond market appears to be telling us this.
Conclusion
The bond market signals more pain ahead for Weatherford. I believe them. Investors should avoid the stock due to a potential ratings downgrade within the next six months and liquidity strain in the latter part of 2016.
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Shock Exchange, New York Shock Exchange (751 clicks)
Long/short equity, long only, short only, special situations
Profile| Send Message| Follow (1,237 followers) Performance
Bonds Signal Pain Ahead For Weatherford
Aug. 25, 2015 4:45 PM ET | 8 comments | About: Weatherford International Ltd. (WFT)
Disclosure: I am/we are short WFT. (More...)
Summary
•Weatherford's stock is down about 60% over the past year. WFT still trades at 8.8x run-rate EBITDA and is hardly cheap.
•Revenue and EBITDA declined by double-digits in Q2 and oil prices have hit 6-year lows.
•Principal payments on $7.8B debt are scheduled to start in 2016, and could cause liquidity strain.
•Weatherford's long-dated bond yields are 602 basis points above U.S. treasuries, up from 432 basis points last month.
•Bonds signal pain ahead for Weatherford. I believe them.
Bondholders tend to be more sophisticated than equity holders. They also tend to represent institutions and are more plugged in than your average investor. What bondholders think may be not be reflected in stock prices until months later. I have been writing about Weatherford's (NYSE:WFT) future liquidity strain for a few weeks now, so I decided to see what the bond market had to say.
The Bond Market Signals Pain Ahead
As of August 20, 2015 the company's bonds trade as low as 86 cents on the dollar. The bonds with the earliest maturity trade at or above par, while most of the longer-dated bonds -- trade below par. The longer the maturity, the more risk bondholders take that they will not be repaid.
The following chart illustrates the discount to where the bonds are trading:
Source: Shock Exchange, E*TRADE
The average price for the company's bonds declined from $101 on July 22nd to $97 on August 22nd, signaling a shift in bondholder sentiment. Average yields also increased from 6.0% in July to 6.3% in August. The 5.5% bonds maturing in February 2015 have a yield of 0.83%. Five of the company's bonds have yields of 7.78% or higher; the 9.9% bond maturing in 2039 has the highest yield at 8.76%, up from 8.13% a month earlier.
According to the EIA the spread between high yield bonds for energy companies and treasuries increased in the second half of the year. The increase reflected investors' increased risk after crude oil prices declined in Q2 2014. The spread for energy bonds reached a high of 1061 basis points in December, and stood at just over 800 basis points in mid-July. The spread above 30 year treasuries for Weatherford's most expensive bond was 602 basis points last week, up from 432 basis points a month ago.
What Changed?
The spread above treasuries for Weatherford's priciest bonds increased about 170 basis points in one month. What changed? On July 22nd the company delivered what I would describe as bleak Q2 results. Revenue and EBITDA fell Q/Q by 15% and 25%, respectively. The company's debt/run-rate EBITDA also rose to about 5.2x, increasing the likelihood of a ratings downgrade within the next six months. Secondly, oil prices have continued to slide as WTI reached a 6 year low. China's recent decision to devalue its currency did not help the outlook for future oil demand.
Principal payments on the company's $7.8 billion debt begin next year. $395 million is due in 2016 and about $1.1 billion from 2017 to 2018. I project liquidity strain for the company as cash dwindles from $611 million at Q2 2015 to approximately $101 million by the end of 2016. WFT is down about 60% over the past year to $7.70. The stock appears cheap compared to a year ago; however, WFT still trades at 8.8x trailing 12 months EBITDA which is hardly cheap given its financial straits. The bond market appears to be telling us this.
Conclusion
The bond market signals more pain ahead for Weatherford. I believe them. Investors should avoid the stock due to a potential ratings downgrade within the next six months and liquidity strain in the latter part of 2016.
Share this article with a colleague