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Why WFT Expects Its Free Cash Flow to Improve in 2H16

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Aug. 19 2016, Updated 9:04 a.m. ET

Weatherford International’s operating cash flow and capex

In this article, we’ll analyze how Weatherford International’s (WFT) operating cash flow has trended over the past few quarters. We’ll also discuss how its free cash flow (or FCF) has been affected given its capital expenditure (capex).

Weatherford International’s cash from operating activities (or CFO) was negative in 2Q16, although it improved over 1Q15. WFT generated CFO of -$139 million in 1Q16. WFT’s revenue has fallen sharply in the past year, leading to lower CFO.

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Weatherford International’s free cash flow

In the 13 quarters until 2Q16, Weatherford International’s FCF was volatile. WFT’s capex fell by 83% in the year leading up to 2Q16.

Despite its lower capex, WFT’s FCF turned negative in 2Q16. In the quarter, WFT’s FCF was -$170 million, compared to $104 million a year earlier.

By comparison, McDermott International (MDR), Weatherford International’s lower market cap peer, saw its FCF fall further into the negatives in 2Q16 compared to 2Q15.

Weatherford International makes up 0.05% of the iShares Russell 1000 Value ETF (IWD).

What’s WFT’s free cash flow projection?

In Weatherford’s 2Q16 earnings conference call, its management revised its 2016 FCF down to a range of $100 million–$150 million. In its previous guidance, disclosed in 1Q16, WFT’s FCF projection for 2016 was $250 million.

The key drivers of WFT’s FCF in 2H16 are expected to be stronger customer collections, lower inventory levels, lower severance cash costs, and the absence of employee annual bonus payments.

Next, we’ll discuss Weatherford International’s historical valuation multiples.

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