Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

The standard playbook when it comes to watching your rivals merge is to hope that it all goes wrong. But Weatherford International, which just saw Halliburton and Baker Hughes call off their deal, isn't using the standard playbook.

Singled Out
Indexed share price performance since the Halliburton-Baker Hughes merger was announced
Source: Bloomberg

For Weatherford, two of its big rivals getting together to form an even bigger competitor actually had a silver lining. When the deal was announced way back in November 2014, it was thought that Weatherford would benefit in two ways. First, it would be able to pick up some assets shaken loose by what was anticipated to be a tough antitrust review. Second, it was thought that oil exploration and production companies, seeking to preserve competition on contracts as Halliburton and Baker Hughes combined, would throw a few more jobs to Weatherford.

In hindsight, such reasoning was a warning in itself that antitrust regulators might stymie the deal altogether. And now, with the competitive landscape unchanged but the oil price crash having surpassed what most expected in that fall of 2014, Weatherford's supposed opportunity has instead become a grim struggle to stay afloat. In early March, it sold new shares equivalent to about 15 percent of its existing float in order to pay off maturing debt. A month before, it had negotiated a relaxation of the debt-to-capital covenant on its revolver.

The equity sale lifted immediate concerns about Weatherford's balance sheet. The problem is that, absent a sustained rebound in oil prices and E&P spending habits, the company faces a grinding process of paying down debt over several years while its rivals, including the newly footloose Baker Hughes and Halliburton, redouble their efforts to also win business in a tough market.

Weatherford's debt marks it out from the sector, even adjusted for the money raised in March.

Net debt-to-capital ratios
Source: Bloomberg, the companies, Bloomberg Gadfly analysis
Note: Pro-forma numbers as of most recent quarter. Assumes $550 million of net proceeds for Weatherford's equity issue and $3.5 billion break-fee paid by Halliburton to Baker Hughes

While Weatherford has allayed concerns about 2016, it still has a relatively heavy maturity schedule coming up, including next year's expiry of its current revolver, which is roughly half drawn.

Heavy '17
Weatherford's debt maturity schedule
Source: Bloomberg

On the positive side, Weatherford is generating positive free cash flow for the first time in years. Consensus forecasts imply it will make almost $1.3 billion through the end of 2018, which is more than enough to pay off $1.05 billion of debt falling due in that period, according to figures compiled by Bloomberg. Still, the range of forecasts suggests a great deal of uncertainty around this.

Free Range
Weatherford's free cash flow
Source: Bloomberg
Note: Figures for 2016 through 2018 are forecasts.

This leaves Weatherford with very little wiggle room versus its major competitors. Free cash flow this year rests in part on a capital expenditure budget that has been slashed to the bone -- $300 million is roughly one-fifth of what it was just two years ago.

Both Halliburton and, in particular, Baker Hughes now have an opportunity to take out costs they were holding onto in anticipation of the merger, putting further competitive pressure on Weatherford. In its announcement on Monday, Baker Hughes not only said it will be buying back $1.5 billion of its own shares -- the kind of extravagance Weatherford can only dream of at this point -- but also said it plans to make savings of $500 million this year. The latter is equivalent to almost one third of Weatherford's annual operating costs. And underpinning all this was Baker Hughes' brief, and hardly encouraging, assessment of the oil-field services market:

More than ever, our customers need to lower their costs and maximize production.

All this would be easier to bear if Weatherford's valuation was at a steep discount to its rivals. But with the stock having run up alongside the latest rally in oil prices, that isn't the case. It trades at a premium to Baker Hughes in terms of price-to-book multiples. In terms of enterprise value as a multiple of 2017 Ebitda, Weatherford trades at a slight discount -- but that could mask a premium given likely cost-cutting, and raised margins, ahead for both Halliburton and Baker Hughes.

Hard Bargain
Pro-forma enterprise value as a multiple of 2017 Ebitda
Source: Bl;oomberg, the companies, Bloomberg Gadfly analysis
Note: Assumes $550 million of proceeds for Weatherford from March equity issuance and $3.5 billion break-fee paid by Halliburton to Baker Hughes.

Above all, while the entire sector remains at the mercy of an oil-price rally that looks shaky when it comes to fundamental supply and demand, Weatherford is more beholden than most. While it may continue to weather the storm, its rivals look poised to pull further ahead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at

To contact the editor responsible for this story:
Mark Gongloff at