Could Upstream Operators’ Capex Affect Weatherford’s Margin?
Weatherford International’s EBITDA margin
As you can see in the graph below, from 2Q16 to 2Q17, Weatherford International’s (WFT) EBITDA (earnings before interest, tax, depreciation, and amortization) margin (or EBITDA as a percentage of revenues) fell marginally from 7.7% to 7.0%. An EBITDA margin is a measure of a company’s operating earnings.
Upstream operators’ capex cut
Aggregate capex (capital expenditure) for 19 of the largest US upstream companies fell 8.0% from 2Q16 to 2Q17. Lower upstream capex resulted in lower prices for OFS (oilfield services and equipment) companies, which reduced OFS companies’ operating revenues and margins. Despite that, WFT’s EBITDA margin, which turned negative a year ago, came back strongly in the past four quarters through 2Q17. The average EBITDA margin of the 25 OFS companies constituting the VanEck Vectors Oil Services ETF (OIH) rose 18.5% in 2Q17 from 15.4% the previous year. OIH has fallen 16.0% in the past year compared to a fall of ~36.0% in WFT stock.
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EBITDA margin for WFT’s peers
National Oilwell Varco’s (NOV) EBITDA margin was 6.4% in 2Q17. Core Laboratories’ (CLB) EBITDA margin was 22.0% that same quarter, while Fairmount Santrol Holdings’ (FMSA) EBITDA margin was 19.4%. You can read about the largest OFS companies in Market Realist’s SLB, HAL, NOV, WFT: How They Stack Up after 2Q17.
The effect of rig count
As of June 30, 2017, the US rig count has risen 118.0% over the previous year. WFT’s revenue share from North America rose to 38.0% from 31.0% in 3Q16.
From June 30, 2017, until the week ended September 8, 2017, four rigs were added to the US rig count, which closed at 944. A deceleration in rig count can negatively affect WFT’s revenues and earnings in 3Q17. In August 2017, the international rig count fell 1.0% over July 2017.
Next, we’ll take a look at Weatherford International’s net debt.