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Will Weatherford Ever Steer Operations Straight?

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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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Read/Post Comments (4) | Recommend This Article (2)

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  • Report this Comment On February 03, 2014, at 11:08 AM, HenryH70 wrote:

    I disagree with the optimistic view of the author. The Romans used decimation, elimination of in ten, as a form of punishment. It is not clear how the dismal operational efficiency will be improved by decimating an already demoralized work force. The unavoidable loss of young talent from Weatherford will create long term inefficiencies long after the positive effects of the short term savings wear off. Deep changes in direction and attitude need to start from the top before austerity measures are applied. The alternative is more of the same next year.

  • Report this Comment On February 05, 2014, at 6:50 PM, cgom774 wrote:

    Clearly HenryH70 above does not understand how the stock is not the company... If WFT, regardless of the employee morale, is able to generate future cash flows that beats expected cash flows, then the stock will over perform the sector and even the market, again, REGARDLESS of a demoralized work force, losing young engineers and even bad management....

  • Report this Comment On February 07, 2014, at 10:33 AM, cracklinrosie25 wrote:

    What is sad is looking at laying off 7,000 people as a positive move...putting 7,000 people and families out of work...into hardship....a positive move would be for the stockholders to fire the incompetent leadership of this company who have proved that they have the leadership and financial intelligence of fleas.

  • Report this Comment On February 18, 2014, at 8:46 AM, cgom774 wrote:

    @cracklinrosie25 Schlumberger does the same every single year... Sometimes twice a year....

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Mark Holder

Mark has been writing for TMF since Dec. 2012 with a primary focus on taking advantage of opportunities provided by the market in the energy and tech sectors.

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