Bernard J. Duroc-Danner
Chairman of the Board, President and Chief Executive Officer
When the brutality of the current down cycle challenged our entire industry, Weatherford went deep and did not pause.
In 2015, after a year of progress on our transformational path towards improved capital efficiency, operational excellence and administrative quality, we did not hesitate. Weatherford responded to change quickly and aggressively. Intensifying our efforts within the harshest industrial context ever experienced, we navigated through what can be best described as the most challenging economic depression our industry has ever faced.
In 2015, our direction was steadfast, and our drive and intensity increased throughout the year. We focused on doing more than just rapidly and efficiently adjusting to steeply deteriorating market conditions. We also endeavored to take advantage of the extreme market conditions to establish structural efficiencies as well as implement productivity enhancements – changes that would secure for your Company a much higher level of operating and financial performance when the market turn would come. Through cycles, our actions are centered around perennially improving our cost structure, optimizing our cash generation and capital allocation as a company-wide discipline and systematically upgrading our talent bench.
Despite challenging economic conditions, we continued to pursue cutting-edge advances in our core business segments' technology and maintained our research and development initiatives. Confirming our pledge to safety, quality and reliability and despite a year of massive decline and reduction in force, Weatherford achieved the highest metric for employee safety in the Company’s recorded history. Safety achievements are seldom compatible with disruptions of retrenchment, and our record is a proxy for both quality and reliability.
Results and operating metrics prove early merits of our direction. Achieved with discipline and determination, our 2015 highlights are:
The core product lines that define your Company's future have low capital intensity and high secular growth attributes.
Our position is one of leadership and high potential. Since beginning our transformational journey, we have focused exclusively on these product lines. We will build them up further and, wherever tactical, pursue different forms of integration.
The current downturn has been very painful for us, but also constructive. We lowered our cost base aggressively to mitigate the combined impact of activity and pricing reductions. We went beyond. We are in the process of permanently reforming our operating cost structure, and our organizational operations have been structurally streamlined within geographic segments. We flattened our product line reporting organization and reduced our manufacturing and service locations. We purposefully delayered our operating organization and did so with an understanding this was a permanent change. We also scaled back some of our geographic market presence, which was counter balanced by an added focus on other market segments.
One example and metric can illustrate the work under way. Our support ratio decreased from 59% in 2014, to 39% by year-end 2015. A 20% decline in support ratio is a colossal structural change in record time. To do this during a cyclical downturn is doubly difficult. In addition, our supply chain initiated a multi-year restructuring of productivity. A fundamental change in efficiencies is driving improvements in manufacturing, logistics and procurement. These proactive actions, along with market share gains in our core markets, resulted in best-in-class full-year decrementals, as compared to our peers. These results reflect our operational progress.
We are in the business to make returns for our shareholders. In 2015, we continued to intensify our focus on free cash flow. Our results have been steady and progressive – a quarter-by-quarter climb. We are doing this not only as a function of the fact we are in a downturn, but as a matter of course. In spite of severe industry conditions, 2015 was the first time we generated full year positive free cash flow since 2010. We consider free cash flow a primary marker for our success.
Over the last few years, there has been a “quantum change” within Weatherford. Our organizational structure was flattened, our support ratio lowered and our headcount reduced, with facilities closed and consolidated. Based on our fundamental progress and our disciplined approach towards guiding our Company through this violent downturn, we are ready to address any market conditions, both managing decrementals in the event of extended market declines as well as to exploit incremental gains when recovery comes.
Human Resources has become for us a strategic competency. We believe developing and strengthening our talent bench is essential in driving incremental performance into our business.
We are now taking a highly systemic approach towards talent development. We have delayered and upgraded our middle and senior operational management. We have bolstered our financial and legal bench. How much we care about our colleagues, our people and their careers is enormously important. Focusing on building our long-term employee base, we have created and developed new company-wide career management programs, offering our young talent a structured framework upon which to grow within our Company. These initiatives are ongoing long-term commitments and our employees are the future of Weatherford.
Over the years, in our chosen fields of competition and in what we call our core, we have built a formidable suite of highly engineered and innovative technologies.
We have purposefully built our capabilities, step-by-step. It has taken us a fraction of the lifespan compared to our competitors to develop this broad and deep technological competency and, in more than one category, we can decisively say we are industry leaders. In addition, our drive to innovate and raise our technological capabilities has never been stronger. We understand our people and our technology make us what we can be for our clients, and we have dedicated ourselves to relentlessly develop both.
2015 has also seen a new dawn for the marketing and commercialization of our technology, and we will achieve the only recognition that truly matters: long-term and sustainable performance for our clients.
During the current downturn, our industry has shifted to a single purpose value mindset. Our customers had an urgent need for greater cost and operational efficiencies, innovative and integrated work flows as well as optimized production. Looking forward, we will aggressively focus on facets of integration in all stages of the drilling and production life cycle. We will do so wherever we can enhance the value of our clients' assets, reducing uncertainty and more efficiently exploiting hydrocarbons.
With a commitment to top safety performance as well as to pursuing the highest levels of service quality and reliability, we are dedicated to continuously improving our metrics.
There is no room for compromise. Successful sales and marketing on the one hand, safety, quality and reliability on the other, are interdependent: we cannot have one without the other. During 2015, we exceeded our previous safety levels and posted the best safety record in our history. Our numbers again confirm our work, and safety is a reflection of quality and reliability.
During the 2015 Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC), Weatherford was awarded Best Oilfield Services Company (International) at the Excellence in Energy Awards ceremony. Finalists were measured across a range of service criteria, which included excellence at project management, adherence to timelines, cost control and overall efficiency and productivity. It is our people who made this happen. This made all of us immensely proud. We measure success through our performance for our clients.
Best International Oilfield Services Company
We manage our business with a commitment to sustainability at all levels of decision making. This is not a matter of social responsibility only. We understand a culture of sustainability adds value to all aspects of our business, helping us better assess risks and opportunities, ultimately leading us to improved cost savings for long-term value creation.
During 2015, and as a result of our ongoing and developing sustainability programs, we were pleased to have been named a constituent in the MSCI Global Sustainability Index as well as the Euronext Vigeo U.S. 50 Index.
We continued to support our local communities by hosting our annual Weatherford Walks charity event, launching the Weatherford WISE (Worldwide Initiative Supporting Education) program as well as donating numerous volunteer hours to other causes around the world.
As a company-wide approach, we anticipate and manage economic, environmental and social opportunities and risks by focusing on quality, innovation and productivity. We view the integration of sustainability criteria into our organization as providing us with a competitive advantage and long-term stakeholder value.
Through these very challenging times for our industry, I am deeply grateful to our shareholders for their commitment and their continued support of our direction.
During a year of great difficulty, low visibility and unpredictable volatility, I would also like to express my appreciation to our Board of Directors for their oversight, steadfast guidance and everything we have accomplished together.
As for our employees, your level of personal commitment and tenacity has enabled us to manage the most severe down cycle in our history, to quickly respond and capitalize on the opportunity to intensify our progress.
Thank you for all you do for Weatherford.
You are Weatherford.
Our direction is clear to all within Weatherford. Our strict focus remains core, cost and cash.
We are strengthening our structural productivity and building on our operating progress to date with more cost rationalization, cash discipline, systemic talent upgrades and an intensified drive in helping our clients improve their own efficiencies and economics. We will not let our guard down. We will only intensify our drive.
We are methodically taking our leverage down, predictably and successfully. We will continue to de-lever our balance sheet and generate free cash flow, maintaining ample liquidity through the current industry downturn. Our recently completed equity offering protects our Company in the event of a protracted down cycle. Grounded on careful assessment and based on a disciplined strategy, our objectives are well understood, planned for and prioritized by all in the organization.
As a paramount mindset, we will maintain a culture based on safety, quality and reliability in all product lines. Our results validate our business model. Our direction will not move an inch. Our drive and intensity will only increase.
The long-term fundamentals of our business remain intact. The steady increase in world energy demand coupled with the acceleration of production decline rates are forcing a balance in supply and demand.
We believe this will occur in a matter of quarters, not years. But there is more. The lack of any significant spare capacity in oil bearing reservoirs ready to produce if needed, is an industry historical first. Worldwide, by our assessment, our industry is producing at full throttle and without any significant spare capacity. As strategic and essential an industry as oil remains, this is arguably not a tenable position. As we look forward, we believe oil prices will inevitably respond to the gradual tightening of the supply-demand balance, with increasing demand and diminishing supply. The present inventory overhang is not a sustainable solution and would only temporarily adjourn a recovery. When the upturn begins in earnest, we believe it will be stronger and more fundamental than current expectations suggest.
Weatherford has now changed its economics and culture. Our main focus is making our Company what it can be, and what it should be. The downturn we are going through has given us an opportunity to intensify our momentum, allowed us to accelerate our transformation and go further than we thought possible. This has everything to do with execution and discipline. We are confident in our technological capabilities, product line depth and breadth as well as market potential for organic growth. As a recovery unfolds, our performance to come will reflect our transformation in all metrics. We are a much stronger Company today.
Bernard J. Duroc-Danner