We reiterate our Neutral recommendation on Weatherford International Ltd. (WFT) following the first quarter of 2011 earnings miss. However, robust results in the company’s North American segment keep us bullish on the same.
Switzerland-based oilfield services’ company, Weatherford’s first quarter 2011 adjusted earnings missed our expectation largely due to lower-than-expected operating income across all the company’s segments, excluding North America. However, the company’s quarterly results grew considerably on an annualized basis, mainly driven by strong North American activity and solid performance in Canada.
Weatherford also expects a gradual improvement in North America margins throughout 2011, excluding the seasonal headwinds in Canada in the second quarter. We 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. We expect Weatherford’s medium-term revenue growth to outpace its peers based on recovering margins and a growing presence in the relatively stable Eastern Hemisphere market.
We are also bullish regarding the company’s international business, particularly in prospective areas of Latin America (Brazil, Colombia and Argentina), Russia and Asia. We believe that Weatherford will be able to generate significantly higher revenue and earnings from international operations with delayed projects coming online in the near term. Meanwhile, the company also expects volumes and pricing to rise in the international market. The upside in volume and pricing will help the company to achieve better margins compared with the year-ago level of 11%
However, we remain concerned about its balance sheet, which is comparatively weaker than those of its peers like Baker Hughes Incorporated (BHI). Weatherford’s debt-to-capitalization ratio is 40.2%, significantly higher than its peer group average.
Further, the impact of geopolitical unrest in the Middle East/North Africa along with the closure of several facilities is a cause of concern.
BAKER-HUGHES (BHI): Free Stock Analysis Report
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