Internal Storm not Over at Weatherford International

Oil-field services company Weatherford International (NYSE: WFT  ) reported earning on Feb. 26. For the most part, growth was there, especially internationally. However, the company still has internal reporting issues surrounding accounting hanging over its head. The good news is that its handling of accounting for contracts in Iraq has been settled.

Before we look at those internal issues, let's take a look at the quarter. Weatherford reported a loss for the quarter of $122 million, or $0.16 per share. After excluding charges earnings came in at a mere $8 million, or $0.01 per share. While that might sound bad, the company actually recorded record revenue of just over $4 billion and generated over $200 million in cash flow from operations. 

International revenue was the big bright spot, jumping 13% to $2.4 billion. If you've been following the oil-field services industry this year you'll have heard this story before. Schlumberger (NYSE: SLB  ) , for example, saw its full-year international revenue jump 16%. CEO Paal Kibsgaard noted that it was the strongest growth since 2008; growth was robust both offshore and in its key land markets. 

This sentiment was echoed by both Baker Hughes (NYSE: BHI  ) and Halliburton (NYSE: HAL  ) as international revenue outpaced any decline in U.S. onshore operations. For Halliburton, it's strong growth internationally was in its Middle East, Asia, and Latin America markets, which more than offset seasonally lower activity in North America. Baker Hughes said virtually the same thing as international revenue grew 11%, despite just a 2% overall rise in rig counts. Baker Hughes was able to grow its North American business by 5% thanks to its strong performance in the Gulf of Mexico.

Unlike those two peers, more than half of Weatherford's revenue comes from its international operations which is helpful given that its North American operations are still clouded by low natural gas prices. For the quarter, North American revenue slid 2% which was in line with rig counts. The darker clouds, though, are the company's internal control issues.

For the quarter, the company's results were affected by those internal issues as $130 million of costs and charges hit, which included:

  • $43 million in professional fees associated with accounting for income tax remediation efforts
  • $64 million associated with legacy lump-sum contracts in Iraq consisting of operating losses of $30 million and tax receivable write-offs $34 million
  • $23 million in severance, exit, and other charges.

The good news is that the company, according to its earnings release, "expects to report [in its Form 10-K, to be filed shortly] that the previously reported material weakness in internal controls over financial reporting related to the accounting for a percentage of completion contract in Iraq has been remediated as of December 31, 2012." Unfortunately, the company also expects to report in that same Form 10-K that "it has not completed the remediation of the previously reported material weakness in internal controls over financial reporting related to income tax. In light of this material weakness we performed additional procedures designed to ensure that our consolidated financial statements are materially correct." At best, this means more associated costs; at worse, there are more problems yet to be uncovered.

As an investor you never want to see that a company that you've invested your hard-earned money in has any "material weakness in internal controls." It's been my experience that the deeper a company looks into these issues the worse they turn out to be. Hopefully, that's not the case at Weatherford, and that these internal storm clouds pass by without a deluge of bad news pouring on investors.

With so many other well run oil and gas service companies you might just want to take a pass on Weatherford until these storm clouds pass. The industry has taken a hit due to a slowdown in the natural gas drilling boom of the last couple of years. As this market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On March 01, 2013, at 6:55 PM, hanover67 wrote:

    I would take a pass but I bought the stock starting in 2010, so I'm either in for the lon haul or I take a loss now. From an investors standpoint, WFT really sucks. As mentioned, accounting problems just keep rolling along. Each quarter I hope the worst is behind the company, and each quarter they have some new, nasty "surprise." I averaged down over time, but I'm still underwater. Where's my bailout?

  • Report this Comment On March 17, 2013, at 7:18 PM, cgom774 wrote:

    Iagree. If you will not trade the swings, take a pass. Investing in well run and sound companies. Weatherford stock is for traders.

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