Taxes Are the Least of Weatherford International Ltd.'s Issues Right Now

Shifting corporate headquarters around for tax benefits doesn't solve the company's larger problems.

Apr 25, 2014 at 2:30PM

Weatherford International (NYSE:WFT) has quite a bit on its plate right now. Between its massive debt load and its recent decision to relocate corporate headquarters to Ireland for corporate tax benefits, there are plenty of things to keep management up at night. Unfortunately, changes like moving corporate headquarters distract from the real problem: growing the business and profitability. Let's take a look at what has been going on at Weatherford and what the company really should do to turn things around. 

Tripping over a dollar to save a dime
The government investigation that led to Weatherford pleading guilty to violations in the Foreign Corrupt Practices Act last year left a pretty big stain on the company's earnings, and more than anything else it has been a distraction. As bad as these issues have been, though, something more problematic for the company has been the severe drop-off in operating margins over the past several years. This chart from Schlumberger (NYSE:SLB) goes to show that in the past two years, Weatherford's operating margin has fallen from 13% to less than 10% since 2011.

Oil Services Margins

Source: Schlumberger investor presentation.

To be fair to Weatherford, it has been hurt by several aspects that have been out of its control, namely the Arab Spring. In 2010, over 50% of the operating income for its Middle East/North Africa/Asia Pacific came from four countries: Algeria, Yemen, Libya, and Iraq. Thanks to political turmoil, civil wars, and terrorist activity, these four have come to represent  less than 5% of operating income since then. Also, Weatherford has seen some slumps from a downturn in capital spending from Mexico's PEMEX and Venezuela's PDVSA has not been paying its bills on time, if at all. These events have hurt Weatherford much more than its peers because some of its competitors have much less of its business coming from these parts of the world.

CompanyPercent of Revenue From Latin America,
Middle East, North Africa & Asia-Pacific
Weatherford 40.4%
Schlumberger 40.9%
Halliburton  29.2%
Baker Hughes 28.9%

Source: Corporate press releases.

One aspect that Weatherford could have controlled but hasn't is ballooning debt. Over the past five years, the company has more than doubled its debt load to $8.7 billion and now has a rather concerning debt-to-capital ratio of 51%, considerably higher than its peer average of 28.5%. That much of a drag on the balance sheet will do just as much damage, if not more, than any tax liabilities will.

Starting to see the forest for the trees
Weatherford's management isn't completely oblivious to these issues, and they are looking to shed some of what it is calling its non-core business segments and let go about 7,000 employees worldwide to make it happen. This will lead to the company focusing on five key segments:

Wft Core

Source: Weatherford International.

It may seem strange to create a business around one segment that loses money, but that is one of the byproducts of the flooded pressure pumping business in North America. Currently, Weatherford has about 85% of its North American pressure pumping fleet contracted out, but it expects that to be at full strength by the middle of the year. 

What a Fool believes
The sale of its non-core businesses will mostly be used to pay down debt. Of all the things Weatherford could do with that, this is probably the best option. What management is saying right now makes sense, but it's one thing to say it and another to actually do it.

As an investment, it is probably best to stay away from Weatherford. Not only is it struggling with profitability and looking to do a major shift in operations, it is still trading at a premium to its oil services peers on a price to next 12 months' estimated earnings basis. If looking for exposure to the oil services market, it is probably best to look at other players in the space until Weatherford can settle into its new office location and hopefully into its more streamlined business model.

America's $600 billion energy problem means invest in these three stocks today
A dark specter is looming that is ready to stop America's energy boom right in its tracks, and no one is talking about it. This one critical element could cost us over $600 billion, but every day we wait that number grows and grows. The U.S. government thinks investment in this sector is so important, even the Internal Revenue Service will give you a free pass if you invest in this select group of stocks. Our analysts at The Motley Fool have combed over this special class of stocks and we have identified three that could make you rich! Find out the names of these IRS-gift-wrapped stocks in our special report "3 Stocks The IRS Is Begging You To Buy." Simply click here and we'll give you free access to this valuable investing resource.

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

The Motley Fool recommends Halliburton. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers