Leading oilfield services’ company Weatherford International Ltd.’s (WFT) third quarter 2011 adjusted earnings of 26 cents per share came in at par with the Zacks Consensus Estimate. The results grew substantially from the year-earlier profit of 11 cents and 17 cents reported in the second quarter of 2011.
The sequential improvement in profitability was largely influenced by field operations.
Total revenue expanded more than 33% year over year to $3,372.7 million, surpassing the Zacks Consensus Estimate of $3,291 million.
Operational Performance
North American revenue climbed 47.6% year over year to $1,619.6 million. Sequentially, revenue was up 20.5%. Artificial Lift, Completion Systems, Wireline and Drilling Services made strong contributions. Robust activity in the U.S. and the recovery from the second quarter’s Canadian break up were the primary growth drivers. The segment posted an operating income of $352.2 million compared with $199.0 million in the year-ago quarter.
Middle East/North Africa/Asia revenue decreased 4.7% year over year and 7.2% sequentially to $572.7 million. The sequential decline was mainly the result of the deconsolidation of three joint ventures and a slowdown in Algerian activity. The segment’s operating income plummeted nearly 76.7% year over year and 54.8% sequentially to $15.3 million.
Europe/West Africa/FSU posted revenue of $588.6 million, up 18.6% year over year but down 0.7% sequentially. The segment’s operating income shot up 36.9% year over year but fell 6.4% on a sequential basis to $86.6 million. Strong performance in Russia and the North Sea pushed revenue growth. But foreign exchange losses resulted in the sequential decline.
Latin American revenue climbed 76.4% year over year and 18.9% sequentially to $591.8 million, aided by Mexico, Brazil and Venezuela. Operating income from this segment was $70.9 million, up 73.2% from the year-ago quarter and 38.8% from the previous quarter.
Liquidity
Weatherford had $273.6 million in cash and cash equivalents at the end of the quarter. As of September 30, 2011, the company’s long-term debt was $6,266.2 million, representing a debt-to-capitalization ratio of 38.8% (versus 38.7% in the preceding quarter). Weatherford spent approximately $377.1 million in capital expenditures during the quarter.
Guidance
Weatherford guided fourth quarter 2011 earnings per share in the range of 30 cents to 34 cents, before adjusting for one-time items, with profit growth expected in all reporting regions. With respect to 2012, the company maintained a positive but more measured outlook for its North American business. Weatherford foresees sustained growth and expanding margins in its Latin America region, underpinned by improvements in Argentina, Brazil, Colombia, Mexico and Venezuela.
The company also expects improvements in the Eastern Hemisphere in 2012, with upside in Europe and Russia, as well as a recovery in the Middle East/North Africa/Asia Pacific region with positive contributions from new contracts with better terms and pricing, the completion of existing contracts and activity improvements in North Africa.
Our Recommendation
Although we remain optimistic on Weatherford’s operational and financial leverage to international growth in 2011, the ongoing political and weather turmoil and the related impact on the company’s results raise apprehensions.
Moreover, Weatherford’s debt-heavy balance sheet, its weak capability to generate free cash flow as well as competition from larger peers such as Schlumberger Limited (SLB) are causes of concern.
Weatherford holds a Zacks #3 Rank, which translates into a Hold rating for a period of one to three months. Consequently, our long-term Neutral recommendation remains unchanged at this stage.
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