On Dec 29, 2015, we issued an updated research report on Weatherford International Ltd. WFT, a leading oilfield services company.
We continue to believe that Weatherford’s medium-term revenue growth will outpace its peers, given its recovering margins and a growing presence in the relatively stable market of the Eastern Hemisphere. We also remain optimistic about the company’s performance in North America, given its exposure to the prolific oil and gas shales and improved pricing across several product lines. With respect to 2015, the company maintained a positive outlook for its North American business.
The measures undertaken by Weatherford to reduce costs both through direct cost reduction in view of the major downturn as well as its overall cost containment structure should result in a more efficient and better run company going forward. With revenue trends projected to surpass its peers, the company is expected to give an improved earnings performance by 2016. Further, cost reductions and improvements in capital efficiency will lead to a positive outlook on the company.
As a result of continued weakness in the North American market conditions, Weatherford plans to further reduce its expenses. The company cut 11,000 jobs during the third quarter and intends to lay off another 3,000 personnel, mainly in the U.S., going forward. Weatherford also shut five of its manufacturing and service facilities along with 70 operating facilities across North America during the first nine months of 2015. The closure of another 20 facilities by the end of the year is also on the agenda. These measures are expected to help the company overcome the impact of the downturn as well as take advantage of the opportunity to form a leaner structure and a tighter organization.
During the fourth quarter, Weatherford expects positive free cash flow from a reduction in working capital balances and efficiency in capital expenditure spending. The company has further reduced its capital expenditure guidance for 2015 by $100 million to $650 million, which is 55% lower than the 2014 level. Based on its cost-reduction efforts, the company estimates annualized savings to exceed $800 million.
While we believe that expenditure on exploration and production activity levels are gaining traction, this might be partially offset by competitive pricing and continued margin pressure from excess capacity. In addition, Weatherford could face a more adverse impact compared with its peers, if the North American market underperforms. This is because a significant portion of its revenues come from this region. Weatherford believes that the depressed natural gas and oil price environment will put further downward pressure on its earnings.
Although secular growth opportunities are available for the company’s new technologies such as Directional drilling and Artificial lift, it may take some time as well as considerable investment in research and development plus marketing before the new technologies achieve critical mass.
Weatherford’s debt-heavy balance sheet, its incapability to generate a strong free cash flow and competition from larger peers are causes for concern.
Zacks Rank and Stocks to Consider
Weatherford carries a Zacks Rank #3 (Hold). Some better-ranked players from the same space are Energy Transfer Equity, L.P. ETE, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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