Will Weatherford Ever Steer Operations Straight?

Weatherford continues to struggle, but the current valuation offers potential for a great turnaround story.

Feb 3, 2014 at 9:44AM

Only last week, Schlumberger (NYSE:SLB) produced solid results based on a strong operating environment in the international segments. Those results would generally present a positive background for other international focused oil-service stocks such as Weatherford International (NYSE:WFT). Unfortunately, though, Weatherford did its typical pre-announcement of bad results regardless of the operating environment.

Weatherford spent the last couple of years dealing with accounting and tax issues that were about to become part of its past. After reporting solid third-quarter results, investors had expected the smallest of the oil-service majors to finally produce solid results for investors. Instead, the company came out with preliminary earnings in a range of $0.05 to $0.08, partially hit by an effective tax rate of 50%. Analysts had expected earnings to grow sequentially from $0.23 reported in the third quarter.

The list of issues included capital-discipline driven reductions in Latin America, operational disruptions in the Middle East, and severe weather conditions in North America. Most investors would see operational disruptions in the Middle East and weather conditions during November and December as normal for the course.

On the positive side, Weatherford announced plans to reduce the 65,000 workforce by 7,000 employees. The move will result in an annualized savings of $500 million. As well, the company paid down debt by $700 million during the fourth quarter to reduce the net debt position to below $8 billion. Another slight positive was the 2014 guidance of earnings between $1.10 to $1.20. While investors were happy to see a number mostly in-line with previous expectations, the real key to the Weatherford story is the company actually hitting those numbers.

Latin America and Middle East
While Weatherford claims problems popped up in Latin America during the fourth quarter, Schlumberger generated a 3% sequential increase in revenue on solid activity in Ecuador, Mexico, and Argentina. In fact, Latin America was a stronger area compared to the low 1% in North America. The area definitely didn't cause Schlumberger to miss earnings.

The Middle East disruptions were possibly the more perplexing, as Schlumberger had fantastic 5% sequential growth in the Middle East and Asia region. Schlumberger specifically pointed out an expanding portfolio of projects in Saudi Arabia, Iraq, and the United Arab Emirates for part of the gains. Of course, the company mentioned gains in Asia, so it isn't clear-cut how much of the growth came from the Middle East.

This comparison is a prime example of how the top operator powers through a difficult environment and the weaker company struggles with numerous unforeseen problems popping up.

Reduced costs
The biggest issue with Weatherford has been a lack of focus on profitable projects and high debt levels. Along with the fourth-quarter warning, Weatherford made two large steps toward rectifying those issues. With a company expecting to generate more than $15 billion in revenue last year, it shouldn't struggle so greatly to generate profits. For the last couple of years, Weatherford has struggled to make much more than $500 million in income, providing for a profit margin in the 3% to 4% range. Conversely, Schlumberger generated more than $6 billion in income for 2013 with a profit margin of nearly 14%.

Weatherford made the big decision to cut more than 10% of the workforce with the announced job cuts of 7,000. The annualized savings will reach $500 million in 2015. Another huge positive was the reduction of debt by $700 million after reaching $8.6 billion at the end of the third quarter.

Bottom line
Regardless of the problems, Weatherford remains a potential big gainer if it can truly succeed in focusing on improving operations. The stock has dropped down to $13.50, providing for a market capitalization of only $10 billion. Until the company proves that it can steer operations straight, the stock might continue to languish. Ultimately, the new focus on improving operations and shedding debt and costs should finally get Weatherford back on solid footing.

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Mark Holder owns shares of Weatherford International Ltd.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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