Weatherford International (WFT) shareholders may be in for a rude, rough jolt Thursday morning.
The Swiss-based oil and gas services provider announced an upsized exchangeable note offering after Wednesday's market close, which sent shares tumbling more than 10% in after-hours trading to just under $5. In premarket trading Thursday, shares were climbing back from Wednesday's lows but were still in negative territory.
Weatherford is offering $1.1 billion of exchangeable senior notes due 2021 with a 5.875% interest rate. Proceeds from the 2021 note offering are expected to fund a separate cash tender offering, the company also announced Wednesday. The cash tender offering is for notes coming due between 2017 and 2020, with greater priority given to the 2017 and 2018 notes. As of the company's first-quarter earnings release, it had $464 million cash on hand and a $5.8 billion long-term debt load, roughly equal to its $5 billion market cap.
Representatives from Weatherford did not immediately respond to requests to comment.
While analysts generally supported Weatherford's move, with a team at Nomura calling it "savvy," the sudden drop in the stock price suggests shareholders were less confident. Refinancing debt buys time for the debtor but if often highlights the fact that the debtor has an unsustainable debt burden. Last month Standard & Poor's lowered its credit rating on Weatherford by two notches to BB-, which places it further into "junk" territory.
"The negative outlook reflects our view that Weatherford's funds from operations to debt will be weak for the rating in 2016 but improve in 2017 as commodity prices recover under our price deck assumptions," S&P said in a release announcing the ratings action.
"We like the exchangeable notes offering for several reasons," Matthew Johnston of Nomura said in a note Thursday. "Most important for WFT was to quickly address its maturity schedule and demonstrate to the market that it could effectively carve out a liquidity path past 2017. A high-yield notes offering could have achieved a maturity extension, but a [high yiled] option was probably not open to the company near term. The notes offering mitigates the dilution that would have come with another equity raise while also easing the interest expense burden."
Still, in the near-term, the offering could put pressure on Weatherford's shares.
"We expect the stock to be sensitive to the exchange terms, which may temporarily place a soft 'ceiling' on the stock price, but liquidity overhangs should be mitigated," Daniel Boyd of BMO Capital Markets said in a note Wednesday. "We do not expect the near-term stock price reaction to be severe given that many investors likely anticipated the need for additional capital."